Last updated: November 22, 2011 1:24 pm

Spain pays more than Greece to borrow

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Spain’s Treasury saw yields rise to painfully high levels on Tuesday when it sold three-month bills at an average yield of 5.11 per cent, more than double the rate it paid last month and higher than yields for Greece and Portugal in recent sales of three-month bills.

Yields on Spain’s six-month bills averaged 5.227 per cent in the auction, up from 3.302 per cent last month, underlining the deepening sovereign debt crisis across the eurozone.

A total of €2.98bn of bills was sold, close to the maximum target of €3bn, but the yields were the highest in 14 years. The Treasury sold €2.01bn of the three-months bills and the offer was 2.9 times subscribed. In six-month bills, €970m were sold with a bid-to-cover ratio of 4.9.

Bond market investors have given Spain no relief despite the election victory on Sunday of Mariano Rajoy, the centre-right Popular party leader who has pledged further austerity and economic reforms once he becomes prime minister in December.

Spain and Italy are the latest and largest eurozone economies to be faced with unsustainably high financing costs in the sovereign bond markets following the earlier bail-outs of Greece, Ireland and Portugal by the European Union and the International Monetary Fund.

Fitch, the credit rating agency, said the incoming Spanish government “must positively surprise investors with an ambitious and radical fiscal and structural reform programme”.

However, Spanish leaders and some analysts believe that there is little Mr Rajoy can do to impress bond investors in the short term without a show of support from the European Central Bank or other European institutions.

“Spain cannot continue financing itself at 7 per cent,” said María Dolores de Cospedal, PP secretary-general, referring to recent yields on 10-year bonds. She called for a “grand operational strategy” that would help eurozone countries fulfilling EU requirements on budget deficit cuts and other economic reforms.

Nicholas Spiro of Spiro Sovereign Strategy said it was significant that the PP’s first concrete statement after winning the election was a plea for the EU to put in place a credible backstop for eurozone sovereign debt.

“This speaks volumes about the current predicament faced by Spain and Italy,” he said. “Domestic policy reforms alone have very little chance of turning sentiment around.”

Economists and political analysts say bond markets appear uninterested in the economic programmes of particular countries and are instead concerned about the lack of an EU strategy to solve the entire eurozone sovereign debt crisis, whether by persuading the ECB to intervene more vigorously, by creating common eurozone bonds or by some other means.

In its statement on Tuesday, Fitch said its high investment grade rating for Spain – currently on double A minus with a negative outlook – was based on its judgment that the country was a solvent and systemically important sovereign that would be helped “in extremis” by the ECB, the European Financial Stability Facility, the IMF, or some combination of the three “to prevent a self-fulfilling liquidity crisis”.

Spanish and Italian bond yields rose to critical levels last week, threatening their public sector borrowing programmes and the stability of the eurozone, in spite of the installation of Mario Monti, a former European commissioner, as Italian prime minister, and the imminent election victory of Mr Rajoy. They have stayed high this week, in spite of pleas from one of Mr Rajoy’s colleagues for a “breathing space”.

Even France has seen its bond yields rise in recent weeks, although on Monday the country insisted that it continued to borrow on international markets at favourable rates and would not budge from its commitment to reduce debt after suffering a threat to its triple A sovereign rating. The credit warning from Moody’s followed a sharp rise in French bond yields.

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