Thursday 19 October 2017

Spain moves step closer to needing full EU bailout

The pay of Spanish civil servants has been cut by up to 7 percent when their Christmas bonus was cancelled, according to media reports. Photo: Reuters
The pay of Spanish civil servants has been cut by up to 7 percent when their Christmas bonus was cancelled, according to media reports. Photo: Reuters
Peter Flanagan

Peter Flanagan

Country pays near record yield at bond auction as key region ponders aid package

SPAIN moved a step closer to needing a full-blown bailout yesterday as the country paid a near record yield at a short term bond auction, the interest rate on its benchmark debt hit new highs and one of its most important regions seemed set to request a bailout from Madrid.

Spain paid the second highest yield on short-term debt since the birth of the euro at an auction yesterday.

The Spanish Treasury sold the €3bn of three and six- month bills it was aiming to, but yields climbed with the six-month paper jumping to 3.69pc from 3.23pc last month.

The interest rate, or yield, Spain has to pay to raise money for 10 years shot up to close to 7.6pc yesterday, well above the 7pc that triggered the bailouts for Ireland and Portugal, while the yield on Spanish five-year bonds moved above the 10-year for the first time, indicating traders believed Spain's problems were moving much more into the immediate term.

By the end of trading yesterday, the yield on Spanish 10- year debt stood at 7.62pc, while its five-year yield briefly went higher before falling back to 7.59pc.

Struggle

Spain's increasingly desperate struggle to put its finances right has seen its borrowing costs soar to levels that are not payable indefinitely.

Italy, commonly regarded as too big to bail out, has been dragged along in its wake.

"The most important takeaway from this auction is that Spain was able get all its debt out the door," said Nicholas Spiro of Spiro Sovereign Strategies. "Still, in March, Spain was able to issue six-month debt at a yield of under 1pc, now it is paying 3.7pc."

The concerns about Spain helped to push down the euro and European stocks. The European currency fell below $1.21 for a second day, also pressured by Moody's Investors Service's decision to cut its outlook for the credit ratings of Germany, the Netherlands and Luxembourg.

European stocks retreated for a third day, with the benchmark Stoxx Europe 600 Index down 0.5pc. London's FTSE 100 lost 0.6pc, while the ISEQ Overall Index slid 1.9pc.

Irish 10-year yields were up slightly at 6.3pc, while Italian bond yields topped 6.6pc.

Meanwhile Catalonia, which produces about a fifth of Spain's economic output, admitted it had financing needs to meet while its access to markets has been shut off, but that it had not decided yet whether to ask Madrid for financial help.

Catalonia has debt repayments of €5.76bn in the second half of the year, with a €2.61bn bond falling due in November.

"We have not made a decision, but we admit that we have liquidity needs, and it has to be the treasury that helps the regions out because that's who we pay taxes to," said the spokeswoman for the region's economy minister.

On Friday, Valencia asked for aid and analysts say several of Spain's 17 autonomous regions could look for help.

Last night Luxembourg finance minister Luc Frieden said the euro area was ready to act to help Spain as the country's borrowing costs soar.

Bailout

While he said no work was being done for a bailout of the Spanish government, policy makers in the 17-nation euro area must be prepared to move quickly.

"In such difficult times as we are in, one has to follow the situation on a permanent, daily basis and be ready to act at any moment," Mr Frieden told Bloomberg news service.

German Finance Minister Wolfgang Schaeuble and his counterpart from Madrid said Spain's borrowing costs don't reflect the strength of its economy as they pledged to work toward deeper integration to fight the debt crisis.

"The current levels of interest rates on sovereign debt markets don't correspond to the fundamentals of the Spanish economy," Schaeuble and Spanish Economy Minister Luis de Guindos said after meeting in Berlin in a joint statement that also praised Spain's deficit-cutting efforts.

Irish Independent

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