SPAIN MANAGED TO raise €2.9 billion in a short-term bond auction today but concerns over the future of the euro currency union pushed investors to demand higher interest rates to lend the money and caused the Madrid stock market to plummet.
The Treasury paid a rate of 3 per cent to sell €2.2 billion in 12-month notes, compared with 2.6 per cent in the last such auction April 17. It paid 3.3 percent to sell €711 million in 18-month notes, up from 3.1 per cent.
Demand for the bonds was good — about double the amount offered in the 12-month category and nearly triple for the 18-month notes. The total amount sold was just short of the upper target of €3 billion.
But that could not mask the concerns of investors, who worried about the future of the 17-country euro currency bloc as political parties in Greece were unable to create a government a full week after general elections.
Investors fear that because Greeks voted heavily in favor of parties that want to either cancel or renegotiate Athens’ international bailout, the country may be forced to default and, ultimately, leave the eurozone.
Uncertainty over the financial impact of such a move on the wider continent caused markets to fall sharply over the past week. Spain, which is considered the next most likely country to need a bailout in Europe, has been shaken particularly hard.
The Ibex stock index in Madrid plunged 2.8 per cent, slightly more than other European markets, while bond yields in the secondary market — where issued bonds are traded openly — rose sharply.
The yield on benchmark 10-year bonds jumped 0.28 of a percentage point to 6.27 percent, according to financial data provider FactSet. In comparison, the yield for the benchmark German bund — seen a safe refuge in turbulent times — fell to 1.44 per cent, making for a spread of 483 basis points against the Spanish bond.
Yields of 7 per cent are considered too expensive for a government over the long term. Spain’s 10-year yield hit 6.7 per cent late last year.
Investors will keep an eye on Spain’s next big debt auction this Thursday, when it will sell notes maturing in 2015 and 2016. According to the Economy Ministry, Spain has met 53 per cent of its medium- and long-term financing needs planned in its 2012 budget.
Beyond the Greek political concerns, the financial turmoil in Spain in recent days has also been caused by concerns about the country’s banking sector, which the government last week sought to reform.
On Friday, Spain told banks to set aside tens of billions more in provisions to offset exposure to the real estate sectore. ”Naturally, that hurts profits. Naturally, the financial sector does not like that,” said Oscar Moreno of Madrid brokerage Renta4.
Spain’s latest financial sector reform is the country’s fourth in two years. None so far has managed to fully convince investors.
Investors worry that bank failures might overwhelm public finances and that the government will be unable to carry out austerity measures and reforms at a time of recession and with unemployment above 24 percent.
The austerity measures are aimed chiefly at slashing the government’s deficit from 8.5 per cent of economic output to below the maximum level set by the European Union of 3 percent by 2013. For this year, the goal is 5.3 per cent.
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