Spain faces first big debt test of 2011
(MADRID) - Spain ventures into the bond market Thursday to raise financing for the first time in 2011, desperate to dispel fears of a debt emergency that would shake the foundations of the euro.
Spain, the fourth biggest economy in the eurozone, equal in size to Ireland, Greece and Portugal combined, must show it can access market financing at affordable rates or re-ignite speculation it will need an international bailout.
The Spanish Treasury plans to raise 2.0-3.0 billion euros ($2.6-3.9 billion) in five-year bonds.
It is a small proportion of this year's financing needs. Spain's central and regional governments and its banks combined need to raise about 290 billion euros in gross debt including rollovers in 2011.
But the result of the bond issue -- the scale of demand and the rate of return demanded by investors -- will be a test of Spain's credit standing on the financial markets.
On the eve of the Spanish issue, Portugal's government raised some hopes by raising 1.25 billion euros with strong interest and with rates that were high but below a psychological fear threshold of 7.0 percent.
In reaction to the Portuguese issue, the Madrid stock market's Ibex-35 index soared 5.42 percent Wednesday, powered by banking shares.
Many analysts believe a financial rescue for Portugal is inevitable despite the relatively painless bond auction and Lisbon's protests that it has no such need.
They are divided on the chances of a bailout for Spain, a prospect that could stretch the eurozone to breaking point.
The European Central Bank seemed to have boosted demand for Portuguese debt by buying bonds on the market ahead of the issue, some analysts said.
The Chinese and Japanese authorities also lightened the market mood by promising to buy debt from the European weaklings, they said.
"However, bond yields at current levels still leave the issue of debt unsustainability unresolved," VTB Capital economist Neil MacKinnon said in London.
"The debt-burdened economies in the eurozone are not out of the woods yet and continue to face an unpalatable diet of economic contraction, banking sector fragility and fiscal austerity. Ultimately, the end-game will require government debt restructuring and bank recapitalisation."
Even if Spain's bond issue goes smoothly Thursday, it faces tougher tests this year including rolling over 21.79 billion euros of sovereign bonds and bills in April, 20.2 billion euros in July and 23.40 billion euros in October.
A Barclays Capital chart shows hefty bank debt redemptions ahead, too, bringing the total of sovereign and bank redemptions in April alone to well over 30 billion euros.
Underlying the market fears are Spain's high annual deficits and sluggish economy, encumbered by an unemployment rate of nearly 20 percent.
Prime Minister Jose Luis Rodriguez Zapatero vowed this week to meet his goals of cutting Spain's deficit from 11.1 percent of economic output in 2009 to 9.3 percent in 2010 and 6.0 percent in 2011.
Ireland was forced to seek an 85-billion-euro bailout from European Union and International Monetary Fund in November last year, six months after Greece's 85-billion-euro rescue.
And while analysts believe existing mechanisms could cope with a similar lifeline for Portugal, they fear a Spanish rescue would have to be far larger, requiring a re-think by the eurozone.
European nations appeared divided over whether to provide a rapid boost to a temporary eurozone crisis fund.
European Commission President Jose Manuel Barroso called Wednesday for an increase in the 440-billion-euro European Financial Stability Facility. But Berlin and Paris hit the brakes, saying there was no need.
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