Spain's latest effort to bring its public finances under control failed to reassure investors Wednesday and the country's borrowing costs rose sharply in the secondary bond markets.
In an auction of medium-term debt, its first test of investor sentiment since last Friday's (EURO)27 billion ($36 billion) deficit-reduction package, Spain only sold (EURO)2.6 billion ($3.5 billion). That was at the bottom end of the (EURO)2.5 billion to (EURO)3.5 billion target it was looking to raise from the sales of bonds that mature in 2015, 2016 and 2020.
Spain has become the latest point of concern in Europe's debt crisis, now that Greece has got its second bailout and tensions in Italy appear to have eased as new premier Mario Monti pushes through his wide-ranging austerity and reform measures. Bailed-out Portugal also appears to be faring well _ its auctions of much-shorter debt earlier met with much more investor enthusiasm.
That concern was clearly evident in the markets where Spanish bonds are openly bought and sold. The yield on the country's ten-year bond spiked around 0.20 percentage point to 5.61 percent. A month ago, that rate was down below 4.9 percent.
The mood in the stock markets was downbeat too though the 0.8 percent decline recorded on the IBEX 35 index was as much to do with waning expectations of another monetary stimulus in the U.S. as Spain's debt problems.
The higher the yield, the more expensive it potentially is for a country to raise money on the bond markets. Last November, Spain's yield hit 6.7 percent _ close to the point where a country can no longer afford to maintain its debt and seek a bailout.
The bond sale came a day after Finance Minister Cristobal Montoro spelled out the details of the new conservative government's 2012 budget proposal to make (EURO)27 billion in spending cuts and tax increases in order to get Spain's deficit down from 8.5 percent of gross domestic product last year to 5.3 percent this year. The cuts are being introduced at a time when unemployment stands at a euro area high of around 23 percent and the country's economy is expected to contract 1.7 percent on the year.
The government also revealed Tuesday that Spain's national debt will shoot up this year from 68.5 percent of GDP to about 80 percent.
Despite growing concerns over Spain, many analysts reckon Spain still has a viable route to avoid the same bailout fate as Greece, Ireland and Portugal. A Spanish bailout would be far more difficult for the country's partners in the eurozone as its economy is twice the size of the three countries that have needed a financial rescue.
"The auction was a little weak," said Alejandro Varela, a fund manager for Madrid brokerage Renta 4 who dismissed suggestions that the sale indicated Spain was headed toward an acute crisis.
"It's a warning sign to the government not to sit back in the process of fiscal consolidation and that although the budget has been presented it must be applied right to the end," said Varela.
He said the result was expected given the pressure that had been building up on Spain in recent weeks.
"The market is simply saying, 'hey don't try to cheat us,'" said Varela. "The budget is credible but investors want it to be carried out and that if you say you're going to cut (EURO)27 billion then cut (EURO)27 billion."
Juan Carlos Martinez Lazaro, economics professor at IE Business School, blamed market jitters for the auction results.
He said Spain's economic situation has not changed significantly from a month ago, when its bond yields at auctions were much lower. Now, he said, there is reason for optimism because the government has passed labor market and financial sector reforms and an austere budget.
"When there was no budget, the market was nervous and now that there is a budget the market is nervous again. There comes a point where nothing makes sense," Martinez Lazaro said, adding that the jumpiness is over how the budget cuts will unfold and days of tension will eventually fade away.
In Wednesday's auction, the average interest rate on the three-year notes was 2.89 percent, up from 2.44 percent in the last such auction on March 15. The bid to cover ratio was 2.4, half what it was in the last auction.
For the notes maturing in 2016, the yield shot up from 3.37 percent to 4.32. The bid-to-cover ratio fell from 4.1 to about 2.5 percent. The 2020 notes had an average interest rate of 5.34 percent.
Ciaran Giles contributed to this report