June 16, 2011 / 9:45 AM / in 8 years

UPDATE 2-Greek pressures weigh on Spain debt auction

* Treasury sells 8-, 15-yr paper at low end of target

* Pays high yields as sale overshadowed by Greek woes

* Treasury has sold over 50 pct of planned 2011 issuance

* Current debt costs not viable in long term - analyst

(Adds comment)

By Nigel Davies

MADRID, June 16 (Reuters) - Spain had to pay investors a high price in the latest test of demand for its debt on Thursday as market tensions over an expected new rescue package for Greece approached fever pitch.

Yields on both 8- and 15-year paper rose well above the maximum of 5 percent that markets think Spain can afford, though analysts blamed that on the fallout from Athens that fuelled a broad-based flight towards safe-haven assets.

“We still have a constructive view on Spain. Today 99 percent of the reaction is due to what is going on in Greece,” said Luca Cazzulani, strategist at UniCredit.

He said that yields over 5 percent on Spain’s ten-year debt - which peaked late morning at an 11-year high of 5.75 percent - were not sustainable in the long term. But the country could cope for several months because of its low debt to GDP ratio. The Treasury sold 1.3 billion euros of a 2019 bond last auctioned in Dec. 2009, and 1.5 billion euros of a 15-year bond last issued in March. The total was below the middle of its 2.5-3.5 billion euro target.

The average yield on the 2019 bond was 5.352 percent, and 6.027 percent on the 2026 bond, tracking a secondary market that saw bond prices sink across the euro zone periphery as Greece’s hopes of a near-term bailout receded while its political crisis deepened.

Spain has not faced problems selling its debt this year, but it remains prey to contagion from weaker countries at the fringes of the euro zone as it continues work to slash its own public deficit in an environment of weak economic growth.

While Spain’s public deficit is high, at 11.2 percent of GDP in 2010, its debt ratio at around 60 percent at the end of 2010 was around 24 percentage points below the euro zone average.

Separately, France sold 8 billion euros of bonds on Thursday, which drew good demand from investors seeking shelter from countries at the fringes of the euro zone. [ID:nLDE75F0GV]

ISSUANCE HURDLES

Spain’s Treasury has now sold 48.4 billion euros, or around 51.5 percent of its total gross debt issuance for the year.

But analysts retain concerns over its ability to keep financing its debt at such high costs.

“At least this is another funding hurdle cleared by Spain, but it is coming at increasing price and therefore an easing of the euro debt crisis is needed for Spain to remain on track with its issuance programme,” said Orlando Green, strategist at Credit Agricole.

The bid-to-cover ratio on the 2019 bond was 2.1, and it was 2.6 on the 15-year bond.

The key spread between Spanish 10-year debt and benchmark German Bunds was around 278 basis points, up around 18 bps on the day and at its highest since January. ES10YT=TWEB DE10YT=TWEB

Additional reporting by London government bonds desk; Editing by Fiona Ortiz, John Stonestreet

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