Spain's borrowing costs soar at auction

The treasury plans to sell more medium-term bonds on Thursday as part of its funding programme to finance the budget deficit.

Story highlights

  • Spain sold more than €3bn of treasury bills on Tuesday, but paid a high price
  • Bid-to-cover ratios, a measure of demand, were better than last time
  • The treasury plans to sell more medium-term bonds on Thursday
  • The eurozone's recapitalization of Spanish domestic banks has failed to ease fears that it will need further aid
Spain succeeded in selling more than €3bn of treasury bills on Tuesday, but paid a high price to maintain access to financial markets amid economists' predictions that it would need a full international bailout for its struggling economy.
The treasury sold €2.4bn of 12-month bills at an average interest rate of 5.074 per cent, sharply up from the 2.985 per cent it paid at the previous auction last month. It sold €639m of 18-month bills at an average of 5.107 per cent, compared with 3.302 per cent previously.
Bid-to-cover ratios, a measure of demand, were 2.16 for the 12-month paper and 4.42 for the 18-month bills, both better than last time, and the treasury sold its maximum allocation at the auction.
Spanish T-bill and bond auctions are being closely watched now that international demand for the country's sovereign debt has collapsed, with the 10-year bond yield in the secondary market breaching 7 per cent -- the level regarded as having triggered the bailouts of Greece, Ireland and Portugal over the past two years.
The treasury plans to sell more medium-term bonds on Thursday as part of its funding programme to finance the budget deficit and repay maturing debt.
An agreement by eurozone governments earlier this month to fund the recapitalisation of Spanish domestic banks with a credit line to Spain of up to €100bn has failed to ease fears that the eurozone's fourth-biggest economy will need further aid.
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A full bailout would cost something close to €500bn, stretch the resources of the European Union and the International Monetary Fund, and raise the possibility that Italy would also require assistance and so herald a break-up of the euro.
A senior EU official said he did not expect a formal Spanish request for bank recapitalisation funds in time for Thursday's meeting of eurozone finance ministers in Luxembourg, where the Spanish rescue will be one of the key agenda items.
"I guess they will want to see the results of the second stress tests before [a request] is actually sent off," said the official.
The Bank of Spain and the centre-right government of Mariano Rajoy are hoping that the results of stress tests by two groups of consultants, Oliver Wyman and Roland Berger, will show that Spanish banks need less than €100bn of new capital when the reports are released later this week.
The next stage of investigation into the financial system is a detailed audit by four leading accountancy firms of the loan books of Spanish banks, many of which have been crippled by bad loans to property developers and construction companies.
Officials said the audit, originally due to have been finished by July 31, would be delayed, probably until September, because all the parties involved agreed there was more work to be done.
"We all have a preference for it to be as thorough as possible. If it is two weeks later but more thorough, I think we would prefer that," the same EU official said of the review's delay.
Data from the Bank of Spain on Monday showed Spanish banks' bad loans rose to 8.72 per cent of their outstanding portfolios in April, the highest since April 1994, highlighting concerns about the country's financial sector.
The review process is being managed by a steering committee composed of the Bank of Spain, the economy ministry, the European Central Bank, the IMF and the central banks of the Netherlands and France.