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Business

Spain enjoys marked drop in borrowing costs

Spain has been able to raise billions of euros at lower interest rates in a short-term bond auction. But analysts say favorable conditions may not last for long with hefty debt repayments around the corner.

Spain's borrowing costs eased considerably on Tuesday, when it tapped the debt market for fresh cash in yet another auction of short-term bonds.

Madrid raised 4.5 billion euros ($5.6 billion) in a sale of 12- and 18-month bills and saw demand outstripping supply by far. "You could say it is a successful issue," said IG Markets Analyst Soledan Pellon. But he added that short-term debt was relatively easy to place and hence not entirely representative of market sentiment. The next long-term bond issue in the country is scheduled for September 6.

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Positive news for Spain's economy

Compared to a similar sale in mid-July, the 12-month rate on Tuesday decreased to 3.070 percent from 3.918 percent, while the 18-month yield dropped to 3.335 percent, down from 4.242 percent over a month ago.

More trouble ahead

But the money raised did little to alleviate Spain's overall financial plight. Eurozone leaders already agreed to provide a 100-billion-euro rescue loan for ailing banks, but the country could still be forced to seek a full-blown bailout by the ECB this fall.

Doubts are still in place as to whether Madrid will be able to repay a debt of 9.02 billion euros in October and make longer-term reimbursements of over 24 billion euros later on.

According to a report by the Foundation for Applied Economic Studies, Spain's 17 powerful regions are on track to bust agreed spending limits. This would make it impossible for the country to stick to its target of reducing deficit levels to 6.3 percent of gross domestic product this year, down from a runaway 8.9 percent in 2011.

hg/mkg (AFP, dapd, dpa)

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