ECB move halves Spain's borrowing costs
Published 21/12/2011 | 05:00
SPAIN'S short-term borrowing costs were halved when the country tapped the money markets yesterday as the effect of new ECB lending hit the markets.
The Spanish government found strong demand for its latest issue of three-month and six-month borrowing in the form of "Treasury bills".
It raised €5.6bn of short-term debt, well over the €4.5bn that it had targeted to raise. Investors indicated a willingness to take up to €18bn of the IOUs.
That demand helped dramatically cut the interest rate paid by the country. Spain is now paying 1.735pc to borrow over three months, down from 5.11pc in November. It's paying 2.435pc to borrow for six months compared with 5.227pc the last time it tapped the markets.
Analysts say the demand comes ahead of the launch of a radical new line of ECB credit to banks today.
The ECB is offering eurozone banks loans of up to three years at an interest rate of just 1pc.
It is a dramatic intervention to help see off the threat of a second credit crunch, and is aimed, at least in part, at helping countries to borrow in the markets.
The theory is that banks that can borrow at 1pc for three years will be willing to lend that cash on to the likes of Spain, Italy and maybe even Ireland, picking up hefty profits along the way.
Yesterday's Spanish debt auction suggests the scheme could work, but market sources are more nervous, particularly when it comes to making longer term loans to countries.
"Almost the first thing investors and analyst look at now when they assess a bank is how exposed it is to government debt, so it would be a brave bank CEO that decides to take a big position in sovereign debt," bond analyst Brian Barry of Evolution Securities told the Irish Independent.
Nevertheless the amount that the ECB lends out today will be closely watched, as will the impact of the new scheme on the credit markets in the weeks ahead.
Yesterday, demand for shorter-term, one-week ECB loans to banks fell as institutions were waiting to fill up on cheap longer-term loans today.