Crisis-hit Spain lures bond buyers but at high cost

MADRID: Spain paid sharply higher borrowing costs to lure buyers for its bonds Thursday as the crisis-torn banking sector tottered towards a bailout.

The treasury raised 2.074 billion euros (US$2.6 billion) in the auction of two-, four- and 10-year bonds, comfortably beating its own target range of 1.0-2.0 billion euros, Bank of Spain figures showed.

The sale attracted healthy demand.

But the state had to pay a high price, with the 10-year bonds fetching more than 6.0 per cent -- a rate widely regarded as unsustainable over the longer term.

Investors fret over the huge, as-yet unknown sums required to rescue Spain's weakened banks, weighed down by a vast exposure to the property sector, which collapsed in 2008.

Stricken lender Bankia, recently nationalised to save it from collapse, has asked for a total of 23.465 billion euros in capital from the state, of which 19 billion euros have yet to be found.

Three other banks could need another 30 billion euros, according to some Spanish reports.

An IMF report on Spanish banks to be released on Monday will price their capital needs at 40-80 billion euros, Spanish newspaper ABC said Thursday, citing a draft of the document.

The Spanish authorities have given themselves two weeks to take a decision on how to recapitalise weakened banks.

In addition to the IMF report, officials are waiting for assessments by two private consulting firms, Roland Berger and Oliver Wyman, on the state of the banks' balance sheets.

Markets have eased the pressure on Spain, however, as expectations mount that Europe will step in to save the banks.

Spain, the eurozone's fourth largest economy, is fighting tooth and nail to avoid an all-out bailout in the style of Portugal, Ireland or Greece and is seeking instead aid directed only at the banks.

Madrid is pushing for European rescue funds to be authorised to intervene directly in the region's banks without the need for a broad rescue that would come with attached austerity conditions.

It is unclear if the European authorities would make such a concession, however.

"What is sure is that things are moving: it seems Spain will manage to obtain a tailor-made rescue for its problematic banking sector," said a report by Bankinter analysts.

A breakdown of the latest Spanish bond sale showed the rate on benchmark 10-year bonds climbed to an average 6.044 per cent from 5.743 per cent in the previous comparable auction April 19.

But that was still short of the euro era record of 6.975 per cent struck on November 17, 2011.
For two-year bonds the rate shot to 4.335 per cent from 3.463 per cent at the previous comparable auction on April 19 and for the four-year bonds it surged to 5.353 per cent from 4.319 on May 17.

"Although the debt auction was positively received by the market, it highlights how bad things have got in Spain," said a report by British-based analysts with online brokerage Forex.com.

Spain was now almost wholly reliant on banks, and the European Central Bank which funds them, to buy its debt, they said.

"International investors are staying away from Spanish debt, so the 'success' of this auction does not mean that the sovereign problems are any less severe," the report said.

"This is important to remember as the sovereign strains could still erupt at any time and rattle the recent stabilisation we have seen in the markets," it cautioned.

- AFP/ir