Spain's borrowing costs fall at first debt sale since austerity bid
Spain's borrowing costs fell yesterday, at the first sale of debt since the government announced a new austerity package, but not enough to suggest markets believe the country's finances are on a sustainable path with banking problems yet to be resolved.
Prime Minister Mariano Rajoy unveiled spending cuts and tax hikes worth €65bn over the next 2-1/2 years last week, in a bid to demonstrate that Madrid can curb its debts.
But market doubts about whether Spain can avoid a full-scale sovereign bailout have kept its debt costs elevated with 10-year yields again heading towards the seven percent tipping point.
New Bank of Spain Governor Luis Maria Linde also took aim at the country's banks, urging them to implement recapitalisation plans quickly, whilst acknowledging for the first time that lenders which are not viable will have to be wound down.
Spain's troubled banking sector lies at the heart of concerns over the health of the eurozone's fourth largest economy, and a quick resolution to the sector's ills could help lower the amount investors demand to buy its debt.
Despite much work to be done, borrowing costs at yesterday's short-term debt sale were sharply lower than a month ago, coming before a key test of appetite for the country's longer term issues tomorrow.
The yield on the 12-month bill was 3.918pc, down from 5.074pct last month, which was its highest in 15 years.
The yield on the 18-month bill was 4.242pc compared with 5.107pc at auction in June, right after Spain sought a bailout for its ailing banks worth up to €100bn.
Eurozone finance ministers are due to discuss the terms of Spain's bank rescue on Friday, a spokeswoman for the chairman of the eurozone ministers, Jean-Claude Juncker, said.
Spain's economy minister said Europe's debt markets were not functioning properly and investors outside the eurozone had no confidence in the euro project.
"There are no (debt) operations between nations in the monetary union and practically the only demand for Italian debt comes from Italians," Luis de Guindos was quoted as saying in Spanish newspaper La Vanguardia.
"A similar thing is happening in France and Spain."
Analysts agree there is little more Spain can do besides the reform work and austerity measures it is already committed to.
"The main challenge is to restore foreign investor confidence in Spain's sovereign paper, with the markets increasingly demanding a "game-changing" response from the EU/ECB to the latest phase of the crisis," said Raj Badiani, economist at consultancy IHS Global Insight.
The short-term debt sale preceded auctions of up to €3bn of medium- and longer-dated bonds tomorrow, when the Treasury will sell paper maturing in 2014, 2017, and 2019.
Orlando Green, strategist at Credit Agricole, said the sales were likely to go well, but would again come at a price.
"Spain cannot continue to pay such high levels for its debt indefinitely.
"If yields do not fall it could bring into doubt the debt sustainability of the country," he said.
Domestic banks likely sucked up the bulk of the €3.56bn sold yesterday, although analysts and market makers said they could be reaching a limit for absorbing sovereign bonds.