Spain's borrowing costs rise in bond auction

Spain raised €2.2 billion ($2.8 billion) in a bond auction Thursday but had to pay sharply higher interest rates to draw in buyers who were concerned that the country may eventually need a bailout.

Spain's stock market rose on the news of the successful bond sale while the interest rate on Spain's 10-year bond — an indicator of market confidence in the country's ability to pay down its debt — fell to 6.48 per cent.

All eyes are now on the government's announcement expected later Thursday of how much money it will take to shore up the country's ailing banks.

Economy Minister Luis de Guindos is expected to reveal the amount, which will be based on two independent audits, later Thursday in Luxembourg, where he will meet his European counterparts. To help struggling Spanish banks, the 17 countries that use the euro habe offered up to €100 billion in loans to the country's government.

It is estimated the banks, laden with bad loans following the collapse of its bloated real estate sector since 2008, could need an external injection in the region of €60 billion.

The big fear, however, is that given current regulations the money will count as a loan to the government and raise Spain's overall debt load. This, in turn, would put more pressure on the country's financing costs and suffocate the government's efforts to get through its second recession in three years and bring down a 24.4 percent jobless rate.

After years of insisting its banks were among the healthiest in Europe, Spain now acknowledges they need a rescue package. But investors are now more concerned about whether the country itself will have to be bailed out, just like Greece, Ireland and Portugal, and if the European Union's finances could handle this.

Finance Minister Cristobal Montoro reiterated in Parliament on Wednesday that Spain, the eurozone's fourth-largest economy, won't need a sovereign bailout "because it does not need to be rescued."

In the debt auction, the Treasury sold €602 million ($765 million) in five-year bonds at an average interest rate of 6.07 percent, up from 5.4 percent in the last such auction June 7. It sold €918 million ($1.2 billion) in three-year bonds at 5.46 percent, up from 4.3 percent, and €699 million ($888 million) in two-year bonds.

Overall, demand was between three and four times the amount on offer, indicating strong investor interest. But the high borrowing costs show that Spain had to pay dearly to drum up interest in the auction.

By contrast, France on Thursday paid an interest rate of 1.43 percent in a sale of its 5-year bonds. Investors have been flocking to the bonds of perceived safe havens of Germany and France, Europe's two largest economies, as concern increases about the debt of weaker countries.

A key problem in Spain and other European countries is that the government and the banks are locked in a vicious cycle of debt. The potential cost of rescuing ailing banks causes government's borrowing rates to rise. But because the banks are the main buyers of the government's debt, concerns about government finances, in turn, further jeopardize the health of the banks.

Despite linger concerns over Spain's long-term problems, markets rose after the bond auction results and on expectation over the audit reports.

Madrid's stock index rose 1.2 percent, more than other indexes. The interest rate, or yield, on the Spanish benchmark 10-year bond on the secondary market fell for the second day in a row. At midday, it was down 0.28 percentage points to 6.45 percent, down further from the 7 percent level it reached Monday.

Such high rates, however, are considered by market-watchers to be unsustainable over the long term rate.