Spain staves off bailout with bonds

MADRID, Spain – Spain clawed its way to financing itself through 2012 without outside help by completing its bond-selling programme on Thursday, November 8, all but ruling out a much-anticipated eurozone bailout this year.

The bond milestone strengthened the hand of Prime Minister Mariano Rajoy as he fights to prevent the eurozone’s fourth-biggest economy from needing a humiliating rescue by its neighbours.

But it was accompanied by renewed tension on financial markets and gloomy European Union growth and deficit forecasts for Spain, which is stuck in a long recession with one in four workers unemployed.

Analysts said Spain appeared to have scraped through without a bailout this year after a bond auction on Thursday took it past its target to sell 86 million euros ($110 million) in medium- and long-term debt throughout 2012.

But they warned the pressure would not let up in 2013, when its financing needs are set to increase.

“Clearly, the pressure on Spain to request a new Eurozone rescue package has eased in recent weeks in line with a more tolerable financing environment,” wrote Raj Badiani at analysis group IHS Global Insight.

“However, Spain still faces substantial economic and financial challenges in 2013.”

Spain’s total gross financing target including short-term debt is 186 billion euros for 2012, rising to 207 billion euros in 2013.

The European Union forecast on Wednesday that Spain’s public deficit would veer way off agreed targets over the next two years and the economy will shrink 1.4 percent this year and next.

“It could take just several poorly received debt auctions alongside the intensifying economic downturn, more financial woes at its struggling banks and insolvent regions and missed fiscal targets to deconstruct demand” for Spanish sovereign debt, Badiani warned.

Debating rescue

Rajoy has kept world markets on edge as he ponders whether to trigger a eurozone rescue, in which the European Central Bank would buy Spanish bonds to drive down Madrid’s financing costs, with strict conditions.

On Tuesday he all but ruled out making such a move in 2012 but vowed to do so if faced with persistent, high borrowing costs.

In Thursday’s auction, the yield eased to 3.66 percent on the three-year bonds from 3.676 percent in the last comparable sale on on September 6, and to 4.68 percent on the five-year bonds from 4.766 percent on July 19.

On the 20-year bonds, the yield was 6.328 percent. In the last sale of bonds with the same 2032 maturity date, the rate was 4.541 percent, but that sale was in October 2010, before the worst of the eurozone debt crisis spread to Spain.

A warning sign came meanwhile from the open bond market on which sovereign debt is traded, where the rate of return demanded for Spain’s benchmark 10-year bonds rose to 5.829 percent on Thursday morning from 5.693 percent.

The risk premium, which compares the yield on Spanish bonds to that of safe-haven German ones, rose to 441 basis points, or 4.41 percentage points, a sign of weakening confidence in Spain.

These rates were seen as a sign of concern that the country was waiting too long to call for help.

“There are very strong pressures that have come from this auction,” said Soledad Pellon, a strategist at IG Markets in Spain. “What the market wants is for the government to ask for a bailout.”

Christian Schulz, an economist at German bank Berenberg, said that due to the ECB’s support and the meeting of the bond-selling target, Spain “does not urgently need an imminent bail-out”.

He said: “But there is a good case for requesting a pre-cautionary credit line” from the eurozone, he added. “It would act more as an insurance policy against future market turmoil.” – Agence France-Presse