Spain, Italy pay steep price to borrow from bond market
Published 14/01/2011 | 05:00
GOVERNMENTS in Spain and Italy were able to borrow billions in the bond market yesterday as funding pressure eased for a fourth day.
The price the countries paid to borrow remains high, and market sources say plans to change the scope of Europe's bailout funds could be rejected by investors, even if politicians can agree to them.
The sense that policy makers are acting with renewed urgency sent the yield Ireland would pay to borrow in the markets from 9.1pc on Monday to 8.3pc last night.
Spain raised €3bn through an auction of five-year bonds but was forced to pay a hefty price to get the deal done.
The yield, or interest, Spain is paying to borrow over five years rose to 4.542pc, compared to the 3.576pc it paid for a similar deal in November.
Italy raised €6bn with a mix of five-year bonds and 15-year bonds. Italy is less vulnerable to the debt crisis than Spain or Portugal because there are few, if any, concerns in the market about the health of the Italian bank sector and because most of what its government borrows comes from its home market.
Italy is paying 3.67pc to borrow €3bn over five years, up from 3.24pc in November. It is the highest rate Italy has paid since January 2009.
Italy placed a further €3bn of bonds, that are due to be repaid in 2026, at a price of 5.06pc, up from 4.81pc at the last auction of similar debt.
The high prices being paid to borrow mean questions remain as to how vulnerable countries will fund themselves through 2011. Portugal needs to borrow around €1bn per month through auctions this year.
Even so, yesterday's bond auctions took place against a rising expectation that eurozone finance ministers were preparing a new plan to end the crisis.
Ideas on the table include cutting the interest being charged to bailed-out countries and increasing the size and flexibility of the European Financial Stability Facility (EFSF).
The EFSF was set up by eurozone countries to raise money to lend to countries locked out of the bond market. An article in the 'Financial Times' said that the fund could be used to buy bonds issued by struggling countries.
ING Bank's Padhraic Garvey, however, said using the EFSF to buy the bonds of distressed countries would make it harder for the fund to raise the finance. He said raising money in the bond market and using it to buy less high-quality bonds would be a turn off for investors.