Spanish Short-Term Borrowing Costs Rise Sharply

Spanish Short-Term Borrowing Costs Rise Sharply

By STEPHEN CASTLE and RAPHAEL MINDER
June 19, 2012
Spain was forced to pay significantly more to raise short-term money Tuesday, a day after its long-term borrowing costs rose to a record high — increasing fears that the crisis in the euro zone was entering another critical phase.
The Spanish Treasury sold €2.4 billion euros, or $3 billion, of 12-month bills at a yield, or interest rate, of 5.074 percent. compared with 2.985 percent at a similar auction last month. It also sold 640 million euros of 18-month debt with a yield of 5.107, compared with 3.302 percent last month.


The Spanish Treasury is also hoping to sell up to 2 billion euros in longer-term bonds on Thursday.

Spain’s request, earlier this month, for a 100 billion-euro bailout for its banks left financial markets unimpressed — partly because the move will add to the country’s debt burden.

The yield on Spanish 10-year bonds, considered the benchmark for borrowing costs, was at 6.988 percent late Tuesday morning. On Monday, the yield rose as high as 7.2 percent on Monday, a record since the inception of the euro and a level seen as many as unsustainable. That, in turn, has raised the possibility that the Spanish government could need a full rescue package of the type other troubled euro countries have sought — and that Spain has tried desperately to avoid.

The government in Madrid has some flexibility in the amount of debt it needs to sell now, as it has already covered about three-fifths of its borrowing needs for the full year through previous sales.

Spain’s Treasury accelerated its scheduled bond sales in the first quarter in order to take advantage of long-term loans provided by the European Central Bank to banks that bought hefty amounts of domestic debt.

On Monday, Luis de Guindos, the economy minister, insisted that “Spain is solvent and this will come to be recognized.” Mr. de Guindos has also acknowledged that borrowing levels around 7 percent would be unsustainable in the medium term, in view of Spain’s refinancing needs.

Christel Aranda-Hassel, senior European economist at Credit Suisse in London, said that, while Spain was still able to issue at this stage, the price was “brutal.”

“They can keep going like this for certainly a couple of months, but obviously you don’t want to be doing this forever — so the pressure is definitely on the euro area member states to figure out how they break the deadlock,” she said.

“The market is very uncertain that the euro will survive and, if that is the case, you don’t touch this debt with a bargepole,” she added. “You need to break this fear that the euro is on the verge of breakup.”

European stocks were down slightly in midday trading, with the Euro Stoxx 50, a measure of European blue-chips, down 0.28 percent.

Asian stocks were also lower, with the Nikkei 225-stock index in Japan down 0.75 percent and the Hang Seng index in Hong Kong down 0.06 percent.

The euro was slightly higher at $1.2592.

Spain has moved back to center stage in the euro crisis after legislative elections in Greece over the weekend brought to power a center-right political party that favors remaining in the euro.

The Greek vote was welcomed in Madrid on Monday by Prime Minister Mariano Rajoy as “very good news for Greece, for the European Union, for the euro and also for Spain.”

But while the victory of the party, New Democracy, removed for the moment the immediate threat of dissolution of the currency zone, it does not address fundamental problems in Spain and elsewhere in the euro zone.

Market confidence in Spain’s bank rescue deal has also been undermined by the fact that its exact terms are yet to be negotiated.

“By admitting that it is no longer capable of propping up its banks, the Rajoy government has sent a message to the markets that the sovereign is in need of external support too,” Nicholas Spiro, managing director of Spiro Sovereign Strategy, a London consulting firm that assesses sovereign debt risk, wrote in a note Monday.

“In the realm of investor perceptions, Spain has crossed the Rubicon from solvency to insolvency. The markets are treating Spain’s bank-focused bailout as a pregnancy: there’s no such thing as a partial one.”

International pressure is mounting on European leaders to take decisive action over the euro debt crisis when they meet for a summit in Brussels at the end of next week.

Finance ministers of the euro zone countries and the broader European Union meet at the end of this week in Luxembourg, where discussions are likely to continue over measures to reinforce the euro zone.

As leaders of the Group of 20 nations started two days of meetings Monday in Los Cabos, Mexico, President Obama echoed the sigh of temporary relief coming from global leaders over the outcome of Greece’s elections, cautiously calling it a “positive” opportunity for the crisis-torn country to form a government.

But Mr. Obama couched his words with what seemed a veiled appeal to Germany to ease up on its austerity-first demands for how Greece should handle its fiscal crisis.

“I think the election in Greece yesterday indicates a positive prospect for not only them forming a government, but also them working constructively with their international partners in order that they can continue on the path of reform and to do so in a way that also offers the prospects for the Greek people to succeed and prosper,” Mr. Obama said Monday.

Tensions burst to the surface when the president of the European Commission, José Manuel Barroso, told reporters Monday that the Europeans had not come to the meeting “to take lessons on democracy or on how to handle the economy.”

Mr. Barroso said the origins of the financial crisis were in the subprime lending market in North America, which he said had contaminated European banks.

In fact, Mr. Barroso has been one of the European leaders consistently pressing for more far-reaching measures from big euro zone countries, but he has encountered a road block in Berlin, where the German chancellor, Angela Merkel, has opted for caution.

Some officials worry that isolating Mrs. Merkel could prove counterproductive by making it more difficult for her to persuade German voters that she is acting in their interests rather than caving in to external pressure.

Meanwhile, the International Monetary Fund announced late Monday that it had received firm commitments from a number of cash-rich emerging economies to contribute to a global contingency fund. The I.M.F. this year asked its members to bolster its financing capacity in case the euro crisis worsened or the global economic picture soured, shutting more vulnerable economies out of debt markets.

The I.M.F. said it had raised a total of $456 billion, nearly doubling its lending capacity. “Countries large and small have rallied to our call for action, and more may join,” said Christine Lagarde, the head of the Washington-based fund, in a statement. “I salute them and their commitment to multilateralism.”

Some countries had worried that building the I.M.F.’s war chest would reduce pressure on Europe to use its own resources to solve its long-simmering sovereign-debt crisis.

But 12 more countries gave specific dollar pledges Monday, including China, with $43 billion, and Brazil, Russia, India and Mexico with $10 billion each. Other countries pledging funds were Colombia, Malaysia, the Philippines, South Africa, Thailand, Turkey and New Zealand. The United States has declined to give additional resources to the I.M.F., saying it believes it has adequate financing.

The additional funds will only be called upon and deployed if the I.M.F. exhausts its other pools of financing. “If drawn, they will be repaid with interest,” the fund said in a statement. “The I.M.F. is committed to assuring our members’ interests and resources are safeguarded.”