Spain five-year borrowing costs hit highest since 1996

Reuters News
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Posted: Jul 18, 2012 6:09 PM
Spain five-year borrowing costs hit highest since 1996

By Paul Day

MADRID (Reuters) - Spain's five-year borrowing costs hit new euro-era highs at an auction on Thursday, sending the euro lower, as it struggles to convince investors it can control its finances, while France sold bonds of similar maturities at yields below 1 percent.

The yield on Spain's July 2017 bond rose to 6.459 percent, up from 6.072 percent when it was last sold just a month ago and the most Madrid has paid to borrow at that maturity for 16 years.

Costs jumped on all three bonds offered, with the longest-dated, a seven-year, coming in near the 7 percent mark beyond which other euro zone countries have been forced to seek aid.

Yields on 10-year Spanish debt trading in the secondary market climbed back above 7 percent after the auction, with the spread versus German Bunds, seen as the least risky euro zone asset, close to record highs at 580 basis points.

In total, Spain sold 3 billion euros ($3.68 billion) of bonds, at the top end of its targeted range although demand was softer than previous auctions.

Reflecting the growing gap between the core and periphery states of the euro zone, France sold 8.96 billion euros of bonds maturing in 2015, 2016 and 2017, including 4.5 billion euros of five-year debt at a yield of 0.86 percent.

"They (Spain) sold what they wanted to sell, that's about the only good thing about it," said Monument Securities strategist Marc Ostwald.

"We shouldn't be surprised that there aren't many people turning up. We're still waiting for the bank bailout to be finalized and there's no guarantee that Spain itself won't need a bailout at some stage, so why would people want to be charging in right now?"

Euro zone finance ministers are due to sign off on up to 100 billion euros of aid for Spain's battered banking sector on Friday, though after cuts and tax hikes failed to convince investors, the sovereign may need a rescue package of its own.

Profits at one of Spain's healthier lenders, Bankinter, fell over 77 percent in the first half after a hit from toxic real estate assets, leaving rivals braced for a tough earnings season amid a deep clean of soured property loans.

DIFFICULT SITUATION

On Friday, Prime Minister Mariano Rajoy detailed new austerity measures worth 65 billion euros over the next two years to reduce one of the euro zone's highest national deficits.

Austerity-weary Spaniards, facing a deep recession that is expected to last until the end of next year at least, have been voicing their anger and public sector workers have called for protests on Thursday in more than 80 Spanish cities.

Treasury Minister Cristobal Montoro said in parliament on Thursday that the government had no other choice than implementing these cuts as the country was on the verge of losing control over its finances.

Unemployment is more than double the European average, with almost a third of people out of work in the euro zone living in Spain, while the government struggles to reinvent an economy hobbled by a burst property bubble.

Thursday's 1.1 billion euro sale of Spain's 5.5 percent bond maturing July 30, 2017, was 2.1 times subscribed compared to 3.4 times in June.

The Treasury also sold 1.4 billion euros worth of 3.3 percent bonds due October 31, 2014 at an average yield of 5.204 percent -- sharply higher from 4.335 percent last month, with the bid-to-cover ratio falling to 1.9 from June's 4.3.

The 4.5 percent bond maturing October 31, 2019 was sold at a yield of 6.701 percent, also a leap from 4.832 percent when it was last sold in February. The Treasury placed 548 million euros worth of the bond, with bids worth 2.9 the amount on offer, compared with 3.3 at the last sale.

Spain has already raised more than 65 percent of its original medium- and long-term debt target of 85 billion euros for the year.

New deficit targets and a central government promise to help the country's struggling regions mean the gross target is expected to increase by more than 20 billion euros, however, adding to pressure on the year's remaining bond auctions. ($1 = 0.8154 euros)

(Additional reporting by Madrid Newsroom, London debt desk; Editing by Julien Toyer and Catherine Evans)