June 7, 2012 / 5:19 AM / 7 years ago

Spain to test markets with bond auction

MADRID (Reuters) - Spain will try to raise between one and two billion euros in bonds on Thursday, a crucial yet cautious test of Madrid’s ability to tap investors after a minister said the country was being cut off from the markets.

Analysts said Spain should be successful in raising the $1.25-2.5 billion, to be split between three bonds, largely because of the low target that was set for the auction.

But the sale of 10-year benchmark bonds will provide indications of confidence in whether Spain can avoid a bailout from the European Union as it struggles to prop up ailing banks and to pay the high interest rates it is being charged.

Earlier this week, the treasury minister rang alarm bells by saying the long-term interest rates the government was having to pay of well over 6 percent, compared to the 1 percent paid by Berlin, indicated markets were closing to Spain, now caught in the eye of the regional storm over debt levels in the euro zone.

On Wednesday, the economy minister said he had no immediate plan to follow Greece, Ireland and Portugal in asking for an EU bailout. But European sources said German and EU officials were urgently looking at how to pump cash into Spanish banks crippled by the collapse of a real estate bubble without forcing Madrid to submit its government finances to international strictures.

Analysts said investors could get worried if Spain, which has funded 56 percent of its planned 2012 issuance under better funding conditions earlier in the year, showed any failure to sell towards to upper end of its target.

“It should be taken down smoothly by domestic banks,” said David Schnautz, strategist at Commerzbank. “Everyone knows the yields are going to be high, but the crucial thing will be to sell a healthy amount of the 10-year bond. That would give a sense that Spain still has access to markets.”

Nicholas Spiro at Spiro Sovereign Strategy said: “If Spain can’t get 1-2 billion euros of debt out the door with an even heftier concession, then it’s game over as far as its auctions are concerned.”

Schnautz at Commerzbank suggested the Treasury should aim to sell around 1 billion euros of the 10-year bond and a further billion split between the two medium-term bonds on sale: “If they sold just 1.5 billion euros, say, that could be seen as a disaster by markets,” he said. “They need to overshoot.”


The Treasury also needs to keep financing costs from rising further out of control as it has to refinance 82 billion euros of debt this year, while helping its indebted autonomous regions repay maturing debts on their accounts of about 16 billion euros in the second half of 2012.

These costs are, however, likely to show a leap compared to what was seen in April when the two medium-term bonds, maturing in 2014 and 2016, and the 10-year bond were last sold.

Spain will likely pay around the secondary market trading level to finance its 10-year debt - close to 6.2 percent.

That would be the highest level the Treasury has paid on 10-year debt since 1997, when it was still using the devaluation-prone peseta, and up from an average yield of 5.743 percent when the bond was last sold on April 19.

Domestic bank support will prove key, with international investors unlikely to show any willingness to buy Spanish debt.

Non-resident holdings of bonds dropped to 38 percent, down from 54 percent last April, data from the Bank of Spain showed, while Spanish lenders held 146.26 billion euros of sovereign debt in April, 30 percent of the total of government bonds in circulation, up from 13 percent in the same month a year ago.

But that support could now well fade if funding costs, driven higher by concerns over undeclared property losses on banks’ books, do not come down in the next few weeks and as the government and European policymakers race to cut the vicious link between the banks and the sovereign creditor.

Domestic banks were able to scoop up large amounts of debt early this year after using the ECB’s three-year cheap funding operations.

For now the Treasury is likely to meet its issuance plans albeit at reduced target levels, casting aside Treasury Minister Cristobal Montoro’s comments on Tuesday that the country was losing access to markets. ($1 = 0.8023 euros)

Editing by Elizabeth Piper

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