Spain was likely to pay record prices to borrow at debt auctions yesterday and tomorrow after the Greek election failed to ease concerns about the future of the eurozone and amid uncertainty over whether Madrid will need a full sovereign bailout.
European shares and the euro inched higher yesterday, but the gains were likely to be limited because investors are worried about Spain’s financial problems ahead of two debt auctions.
The yield on Spanish 10-year bonds hit a fresh high of above 7 percent on Monday as initial relief over the victory of pro-bailout parties in Greece gave way to ongoing fears of deeper problems facing the bloc.
Seven percent is considered too pricey for a country to afford over the long term. Such levels have previously led to bailouts in Greece, Ireland and Portugal.
“The jump in Spanish borrowing costs shows very clearly that global leaders are running out of time to find the solution to the eurozone crisis,” said Michiyoshi Kato, senior vice president of forex sales at Mizuho Corporate Bank in Tokyo.
Spanish Treasury Minister Cristobal Montoro told the Spanish Senate during a budget hearing on Monday that the European Central Bank (ECB) should step in to fight market pressure, essentially a call for the bank to buy Spanish debt again, something it is very reluctant to do.
The Spanish Treasury was to issue between 2 billion and 3 billion euros (US$2.52 billion and US$3.79 billion) of 12 and 18-month debt yesterday, followed by between 1 billion and 2 billion euros of bonds due in 2014, 2015 and 2017 tomorrow.
Monday’s market response to the Greek election — in which parties committed to the conditions of an EU/IMF bailout won by a narrow margin — suggest the prognosis is not good.
“It looks as though the market’s broken now. I don’t think there’s anything the Spanish can do to bring it back. I don’t think the ECB can bring it back ... [a full sovereign bailout for Spain] is inevitable,” London-based RBS rate strategist Harvinder Sian said. “With the [G20] summit not looking like it will produce anything particularly dramatic to help in the crisis situation, I think the market’s made its statement. There has to be a change in the way the Europeans are attacking the crisis.”
As options for the government to raise debt at an affordable price run out, Madrid is studying issuing about 6 billion euros via the state-held cash cow, the lottery company, Expansion reported yesterday.
Spain is the eurozone’s fourth-largest economy and more than twice the size of bailed-out eurozone partners Greece, Portugal and Ireland combined.
The 12-month bill was trading on Monday in the secondary market, considered a good guide of primary auction yields, at about 4.9 percent.
Last month, the 12-month auctioned at 2.985 percent.
Tomorrow might be a bigger test, when Spain auctions bonds maturing on April 30, 2014, July 30, 2015 and July 30, 2017.
On Monday, the 2014 bond was trading at about 5.5 percent, compared with 2.069 percent at its last primary auction on March 1. The 2015 bond was trading above 6 percent after 4.876 percent on May 17 and the 2017 was trading at 6.7 percent, compared with 4.96 percent on May 3.