Saturday 20 January 2018

Sharp rise in cost of Spanish borrowing sends euro lower

Spain's Deputy Prime Minister Soraya Saenz de Santamaria (L) talks with Economy Minister Luis de Guindos (R) and Treasury and Public Administration Minister Cristobal Montoro before a parliamentary session at Spanish parliament in Madrid. Photo: Reuters
Spain's Deputy Prime Minister Soraya Saenz de Santamaria (L) talks with Economy Minister Luis de Guindos (R) and Treasury and Public Administration Minister Cristobal Montoro before a parliamentary session at Spanish parliament in Madrid. Photo: Reuters

Richard Hubbard

A SHARP rise in Spain's borrowing costs on Thursday sent the single currency lower as fears rose that a full sovereign bailout was inevitable, but European shares hit 11-weeks highs as second-quarter company results lifted sentiment.

Despite all the efforts by Madrid to cut its budget deficit and tackle problems in its banking system, government bond yields rose sharply at an auction of two- to seven-year debt.



"We're still waiting for the bank bailout to be finalised, and there's no guarantee that Spain itself won't need a bailout at some stage," said Marc Ostwald, a strategist at Monument Securities in London.



In the immediate aftermath of the auction, 10-year Spanish government bond yields extended their recent rises, adding a further 7.3 basis points on the day to 7.03pc.



Five-year yields were up 10 bps at 6.44pc.



A 10-year bond yield of over 7pc, as happened with Greek, Portuguese and Irish sovereign debt, is a level many analysts consider to be unsustainable.



The main Spanish share index, the IBEX, turned negative after the sale and was down 0.2pc.



Spain should receive some good news later in the day when the German parliament votes on the rescue programme for its troubled banks, which should then pave the way for a formal approval by euro area finance ministers on Friday.



In contrast to Spain, French borrowing costs plunged at an €8.96bn sale of bonds maturing in 2015, 2016 and 2017, with two-year yields running at near zero.



France is benefiting from demand by investors for the debt of the euro zone's best-rated sovereign issuers after the European Central Bank cut its overnight deposit rate to zero earlier this month.



In the wake of the ECB's move, French bonds have rallied strongly, with the premium investors require to hold 10-year French bonds over their German equivalent falling 25 basis points so far this month.

Reuters

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