04 April 2012

Bloomberg: Rajoy says Spain in extreme difficulty as bond demand drops

Rajoy raised the threat of an international bailout for the second time this week as he sought to defend the deepest austerity moves in at least three decades. While “no one likes” the budget presented last week, he said “the alternative is infinitely worse”.

Spain sold €2.59 billion of bonds, just above the minimum amount it planned for the auction and below the €3.5 billion maximum target. The average yield on the bonds due in October 2016, which act as the five-year benchmark, rose to 4.319 per cent from 3.376 percent at last month’s sale. Secondary-market yields rose to 4.48 per cent.

Spain’s 10-year borrowing costs are approaching the levels seen in December, before the European Central Bank said it would make unlimited three-year loans to banks. Some of the €1 trillion taken in the so-called LTROs has been recycled into high-yielding government debt, which initially helped shave as much as 95 basis points off Spanish yields before they began to rise again in March.

Spanish borrowing costs have been going up since Rajoy announced on March 2 that his government wouldn’t comply with the deficit target the previous administration had set with the European Union. Euro region finance ministers then settled on a target of 5.3 per cent of gross domestic product for Spain. The country hasn’t met the EU’s 3 per cent deficit ceiling since 200, and the government forecasts debt to reach 79.8 per cent of GDP this year, the highest in more than three decades.

The government, which failed to win a majority in a regional election in Andalusia on March 25 and faced a general strike four days later, is trying to defend the 2012 budget it sent to Parliament yesterday. The plan pledges more than €27 billion in deficit reduction to cut 3.2 percentage points from a budget shortfall that reached 8.5 per cent of GDP last year. The plan includes an amnesty for tax-evaders and higher corporate taxes, while slashing ministries’ spending by 17 per cent.

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