Sat | Jun 19, 2021

Spain caps bad week with successful bond sale

Published:Friday | June 8, 2012 | 12:00 AM

Spain raised €2.1 billion (US$2.62 billion) Thursday from the bond markets - but investors demanded a higher interest rate out of concern that the country's troubled banks were weighing heavily on government finances.

The successful sale of medium and long-term debt came just days after Spain made its most explicit signal that it needs help from Europe for its struggling banks, while Finance Minister Cristobal Montoro warned that the high interest rates demanded by investors on Spanish debt in recent weeks indicated "the door to the markets is not open for Spain".

Spain's banks are saddled with billions in soured property investments following the bursting of the country's real estate bubble.

At the end of May, the most stricken lender, Bankia SA, said it needed €19 billion in government aid to shore up its finances against losses on its toxic home loans. But Spain only has €5 billion left in a €19-billion fund that it established in 2009 to help banks and has not mapped out a plan for raising the extra funds.

Estimates have put the cost of a complete bailout for the Spanish banking sector between €40 billion and €100 billion.

Spain would like to get European aid for its banks but is reluctant to ask for it because under current rules the aid would have to be given to the government. That would allow Brussels to dictate policies to Madrid, something the Spanish government is keen to avoid. It would also further hit investor confidence, sending interest rates on its bonds even higher.

The interest rate on Spanish debt has soared in recent weeks to as high as 6.7 per cent on fears over the country's creditworthiness. A rate of seven per cent is considered by market-watchers as unsustainable over the long term - and the point at which Greece, Ireland and Portugal had asked for a bailout.

Economy Minister Luis de Guindos said Wednesday that a decision on recapitalising the sector would be made after two international auditing firms contracted to pinpoint the extent of the troubled banks' problems issue their reports at the end of the month.

An IMF report on the banks will be completed next Monday.

Wednesday's bond sale saw strong demand for the country's 10-year bonds - about 3.3 times the amount on offer. The Treasury also sold bonds maturing in 2014 and 2016.

The Treasury paid an average interest rate of 6 per cent to sell €611 million in key 10-year bonds, up from 5.7 per cent in the last such auction April 19.

The rate is still lower than the 6.1 per cent being demanded on the secondary market, where issued bonds are traded openly and the rate is seen as an indicator of investor wariness.

- AP