Spain’s borrowing costs surge

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Bank of Spain in Madrid

Spain’s borrowing costs surged on Tuesday after investors anxiously eyeing stalled Greek rescue talks demanded sharply higher returns to buy the country’s short-term debt.

Spain sold €3.79bn ($5.4bn) of 12-month bonds at an average yield of 3.702 per cent, significantly higher than the 2.695 per cent paid last month. The treasury sold a further €661m of 18-month debt at an average yield of 3.912 per cent, up from 3.26 per cent in June.

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Madrid’s borrowing costs have jumped to fresh euro-era highs in the past two weeks against a backdrop of continued confusion among investors about the eventual fate of Greece’s sovereign debt and an abrupt change in sentiment towards Italy.

Reflecting the deteriorating market for Spanish debt, demand for the 12-month sale, gauged by the so-called bid-to-cover ratio that weighs bids against the total amount of debt on offer, came in at 2.2 times compared with 2.9 times in June. Demand for the 18-month sale was higher than June, however, with cover rising from 3.9 times to 5.5 times.

A package of economic reforms and austerity measures has so far failed to reassure the international investors that Spain – and other European governments – are depending on to roll over national debt needed to finance public expenditure.

“This is no longer a country-specific issue, it is a euro-area problem,” said Javier Díaz Giménez, a professor at IESE business school. “There is no question that both Spain and Italy are too large to be rescued, and unless there is a major change coming from Brussels it is very hard to see how Spain can return to sustainable growth.”

Spain has pledged to trim its budget deficit to about 6 per cent this year from 9 per cent in 2010, in part by trimming public sector wages and privatising part of the national airport authority and state lottery.

On Thursday, Spain plans to sell up to €2.75bn of long-term 10- and 15-year bonds in an auction that will be closely monitored by investors and a nervous government alike.

The yield on the benchmark 10-year government bond, which moves inversely to price, has shot up to 6.37 per cent over the past week, close to levels that in effect closed access to debt markets for Greece, Portugal and Ireland and forced them to accept international rescues.

Ten-year yields eased slightly on Tuesday to about 6.2 per cent, while the spread between equivalent German debt narrowed to 345 basis points, down from a euro-era high of 376bp hit last week.