EU crisis plan fails to calm nerves on Spain
(MADRID) - Spain paid sharply higher borrowing costs on key 10-year bonds Thursday, a sign that a European Union deal to tackle the eurozone crisis has failed to calm investors' nerves.
Analysts warned of lingering anxiety over Spain, the eurozone's fourth-biggest economy, whose borrowing rates are seen as a crucial warning for the rest of the eurozone amid fears that the debt crisis could spread.
Spain sold 3.0 billion euros ($3.8 billion) of three-, four- and 10-year government bonds in its first debt auction since EU summit on June 29, the central bank said in a statement.
"The markets remain wary," wrote Raj Badiani of analyst group IHS Global Insight in a note on the Spanish auction.
"They have reacted favourably before to measures announced at previous European summits to tackle the eurozone sovereign debt crisis, only for flaws to be found in the detail."
Despite raising the full amount it had aimed for, on the 10-year bonds Spain had to offer investors an average return of 6.430 percent, up from 6.044 percent in the last comparable sale on June 7.
The EU leaders on June 29 agreed to set up a eurozone-wide banking supervisory body and to allow eurozone bailout funds to recapitalise ailing banks directly, without adding to countries' sovereign debt loads.
Investors looked to the European Central Bank, which later on Thursday cut its main interest rate to a new record low of 0.75 percent to boost economic activity in recession-hit eurozone countries such as Spain.
Economists say the ECB needs to go further and resume buying sovereign bonds on the open market to drive down borrowing costs.
"Investors need something more from the ECB -- a clear message that it is ready to act to relaunch eurozone economic growth and avoid its financial collapse," said analysts at brokerage Link Securities.
In Thursday's sale the repayment rates on Spanish four-year bonds rose to 5.536 percent, from 5.353 percent on June 7, the Bank of Spain said.
On the shorter-term three-year bonds the rate fell to 5.086 percent from 5.457 percent in the last comparable sale on June 21.
The yield on Spanish debt rose on the secondary debt market, where 10-year bonds changed hands for 6.773 percent on Thursday afternoon, up from 6.375 percent on Wednesday evening.
Spain's risk premium, which measures the extra yield demanded in comparison with safe-haven German 10-year bonds, remained high at 503 basis points.
Overall demand at the bond auction was solid at 7.8 billion euros but weaker than during other recent debt sales.
The economy ministry said that after Thursday's sale Spain had completed 65 percent of its borrowing for 2012.
Thursday's auction results followed reports that Spain's conservative government would next week announce more tough economic reforms, on top of measures passed this year that aim to save tens of billions of euros.
"Worryingly, the bond markets didn't react to the Spanish government planning to announce new austerity measures next week," wrote Badiani.
This suggested "the Spanish government is close to exhausting its domestic policy ammunition in order to restore foreign investor confidence."
Madrid's IBEX-35 leading stock index plunged by more than three percent, dragged down by bank shares, in afternoon trading after the sale and the ECB meeting, during which bank president Mario Draghi said additional measures had not been discussed.