Spanish bond auction reaps more cash for higher interests | Business| Economy and finance news from a German perspective | DW | 07.06.2012
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Spanish bond auction reaps more cash for higher interests

Spain has passed a crucial test of market confidence, selling more government bonds than originally planned. But rising costs for borrowing are adding to the debt-laden country's fiscal woes.

A Spanish Euro coin is photographed in Nauen near Berlin Wednesday, April 4, 2012. 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 (US$ 36 billion) deficit-reduction package, Spain only sold euro 2.6 billion (US$ 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. (Foto:Ferdinand Ostrop/AP/dapd)

Symbolbild Spanien Euro

Spain successfully raised 2.07 billion euros ($2.6 billion) from three bond auctions, with benchmark 10-year government bonds oversubscribed by more than three times, the Spanish Treasury said Thursday.

However, as demand for the country's sovereign debt was "very high," the interests charged by investors in return for the funding also soared, reaching 6.1 percent for the 10-year treasury bills, up from 5.74 percent in April.

Interest rates for the shorter term also rose, the Treasury said, rising from 3.46 percent to 4.33 percent for bonds maturing in 2014, and from 4.32 percent to 5.35 percent for government debt to be repaid in 2016.

Economists believe that borrowing costs above six percent are unsustainable for any government. In the case of Spain, the rise in interest rates will further undermine the government's ability to resolve its budget crisis and shore up its troubled banking sector.

Mixed signals

On Monday, Spain's Finance Minister Cristobal Montoro warned that the high risk premiums his government needed to pay in recent weeks would mean that "the door to the markets is not open" for Spain.

Therefore, analysts saw the bond auction as a crucial test of market sentiment after turbulent weeks.

Describing the auction as "successful," Alessandro Giansanti, analyst with ING Bank in Amsterdam, told Reuters news agency that the market environment for Spanish bonds had "improved on the back of hopes for a eurozone rescue of Spanish banks."

Peter Chatwell, analyst with Credit Agricole, told the same news agency that the bond sale "proceeded without problems" because the number of bonds on offer was "rather small."

uhe/gb (rtr, dpa, afp)