Spain's crucial bond auction

Spain sold 2.54 billion euros ($3.32 billion) of government bonds in a closely watched auction on Thursday. Due to strong investor appetite, Madrid was able to surpass its target of up to 2.5 billion euros.

But investors insisted on a higher premium to buy into the sovereign debt auction, which was seen as a major test of market confidence in Spain's endeavors to rein in public spending.

Benchmark 10-year bonds fetched a yield of 5.78 percent, up from 5.4 percent in the previous auction of such long-term bills on April 4. But although interest rates were higher, they remained below the psychologically important three-percent threshold.

European stock markets responded positively in early Thursday trading, and the euro also rallied against the dollar.

Misgivings remain

Spain has already raised half of its gross target for the current year, making the most of market liquidity after European banks mopped up more than a trillion euros of ultra-cheap cash from the continent's central bank.

But despite a series of successful bond auctions in recent weeks, concern is mounting among economic pundits that Spain may not be able to reach its budget deficit target of 5.3 percent in 2012, and more importantly, that it may need a bailout from the European Union and the international Monetary Fund (IMF).

But there are doubts whether the current rescue funds would be big enough for Spain. "Markets are becoming increasingly worried that in the absence of a much bigger firewall Spain will find itself in a similar situation to Greece, only without the luxury of a sufficient bailout to fall back on," Michael Hewson, an economist with CMC Markets, told AFP news agency.

A G20 meeting ending on Friday will debate the need for boosting the IMF's war chest to $500 billion, up from $320 billion.

hg/nk (dpa, AFP, Reuters)