Spain passes crucial debt test

2011-01-13 17:37

Madrid - Spain passed a pivotal test in its first bond auction of 2011 on Thursday, spurring hope it can avoid an emergency bailout that would rock the entire eurozone.

Spain proved it can tap the financial markets for money, selling its maximum target of €3bn in five-year bonds with demand outstripping supply by two-to-one, a fairly comfortable ratio.

The Treasury forked out an average interest rate of 4.542% to lure investors, a competitive rate when compared to Wednesday's market close of 4.767%.

Nevertheless, it was sharply up from the 3.576% Spain paid at the last year five-year bond auction on November 4, a few weeks before debt-stricken Ireland was forced to seek an EU-International Monetary Fund bailout.

"The issue went very well, with much more demand than at the last auction in November," said Jose Carlos Diez, chief economist at leading bond dealer Intermoney Valores.

"The likelihood of a rescue plan for Spain is very low because there is a good liquidity cushion," he said.

Spanish stocks rallied in relief.

After leaping 5.42% on Wednesday following a successful bond sale by Portugal, the Madrid stock exchange's Ibex-35 index was up another 2.74% mid-afternoon, led again by soaring bank shares.

Portugal, widely feared to be the next victim of the European debt quagmire, had eased the way with a bond auction on Wednesday when it raised €1.25bn at rates below the key threshold of 7%.

Italy eases fears

Italy soothed European debt concerns, too, raising its maximum target of €6bn in bonds on Thursday. On the five-year bonds sold, it paid 3.67%, lower than the market rate on Wednesday's close but up significantly from the previous auction November 12.

Despite the market enthusiasm, independent Barcelona-based economist Edward Hugh said that the Spanish and Portuguese bond sales had done no more than buy some time.

"This week's news is not really important. They got basically another week, they have until their next bond sales," Hugh said.

Investor sentiment for the Spanish and Portuguese bond sales had been boosted by Wednesday's news that the German economy expanded 3.6% last year, the strongest gain since reunification in 1990, he said.

Spain's auction represents only a small proportion of the country's financing needs for this year.

Spain's central and regional governments and its banks combined need to raise about €290bn in gross debt including rollovers in 2011, according to Moody's Investors Service.

It has to roll over €21.79bn of sovereign bonds and bills in April, €20.2bn in July and €23.40bn in October.

Finance Minister Elena Salgado said Spain had no need of an EU bailout, a prospect that could stretch the eurozone to breaking point, in an interview with US network CNBC shortly before the bond auction.

"If you are talking about financial assistance, for sure, not," she told CNBC.

"But of course, any of the countries of the euro area, we need all the others because we have to improve our economic governance so we have to work together but if you are talking about a bailout, definitely not."

Spain could raise money without support from European Central Bank, she added.

Natalia Aguirre, analyst at Renta 4 brokerage, said the bond sale demonstrated that Spain could raise finance on the markets at a reasonable cost.

"With this issue, the fears of a rescue plan for Portugal and Spain ease but they can't disappear," she said.

"The outlook for the next months depends on everyone doing their bit - government reforms, the ECB carrying on buying debt and Europe together taking coordinated action and confronting the sovereign debt crisis to avoid a contagion effect."

Underlying the market fears are Spain's high annual deficits and sluggish economy, encumbered by an unemployment rate of nearly 20%.

Prime Minister Jose Luis Rodriguez Zapatero vowed this week to meet his goals of cutting Spain's deficit from 11.1% of economic output in 2009 to 9.3% in 2010 and 6% in 2011.

The EU deficit limit is 3%.