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Spain forced to double rates at bond auction

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(MADRID) - Spain was forced to almost double the interest paid on short-term bonds in an auction on Tuesday, its first following the Irish bailout, while the spread on its 10-year bonds rose to new highs.

The bonds were issued in tranches of three and six months, and demand was strong totalling 7.98 billion euros. The Spanish treasury raised 3.26 billion euros, in its target range of 3.0-4.0 billion euros for the auction.

But the rates offered were sharply higher than at the last similar auction on October 26, at 1.743 percent for the three-month bonds, up from 0.951 percent previously.

The yield on the six-month paper jumped to 2.111 percent from 1.285 percent.

Rates or yields on bonds issued by Ireland, now the subject of an EU orchestrated rescue, and by Portugal, Greece, and Spain and to a lesser extent Italy, have risen as their public finances come under increasing strain.

The difference, or spread, between the rate that Spain must pay to attract funds for 10 years, and the rate paid by Germany which represents the benchmark rate in the eurozone, also rose on Tuesday to a new historic high of 236.1 basis points or 2.361 percentage points.

It is now at a wider level than at the peak of the Greek debt crisis.

"Back in May and June the market wasn't so worried about the outlook for Spain," said Kathleen Brooks, a research director at Forex.com in London.

"But post the Irish debt crisis, Spain has come centre stage as investors fear that if its debt problems become too much for it to handle then it could be too big for the EU/IMF to bail."

The governor of the Bank of Spain, Miguel Angel Fernandez Ordonez meanwhile said on Tuesday that the effects of the debt crisis in Ireland "have spread" in a "rapid" way to some other eurozone countries and that this "has been felt" on the Spanish debt market.

"We have seen in recent weeks a new period of tension in European debt markets," he told the budget committee of the Spanish senate.

The Spanish stock market closed down 3.05 percent, having dropped by 2.68 percent on Monday, as investors digested the implications of the rescue for Ireland.

Shares in banks and in Spain's most heavily indebted firms led losses.

"The Irish bailout hasn't come close to solving all the problems. The market reaction to the bailout suggests that investors demand more fiscal tightening measures and structural reforms before issuing a vote of confidence to fiscally frail economies like those of Spain and Portugal," Spanish brokerage Grupo Renta 4 said in a note to clients.

Spanish and Portuguese officials have stressed that their countries do not need help.

But experts note that the Spanish economy is showing almost zero growth, that the unemployment rate of 20 percent is the highest in the eurozone, and that in some quarters reforms of the labour market and of savings institutions are considered insufficient to correct overburdened public finances.

Spain is a member of the eurozone and has the fifth-biggest economy in the European Union, far bigger than the economies of eurozone countries Greece and Ireland.

The issue of bonds enables a country to borrow from the pool of global savings. They are issued for a fixed period with a fixed interest rate, but may then be traded continuously.

As perceptions of risk attached to them change, for example if risk rises, money moves out of the bonds. This depresses the price and the fixed income return or yield automatically rises, signalling that the government will have to offer higher interest the next time it borrows.


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