Spain, France auction debt off at lower rates

By Nigel Davies ,Reuters

MADRID — Spain and France enjoyed a blast of positive investor sentiment on Thursday with borrowing costs falling at debt auctions stoked by cheap cash from Europe’s central bank.

The sale of 4.6 billion euros in Spanish debt meant Madrid is now way ahead of what it had planned to issue this year. Around 25 percent of the total is already accounted for.

Similarly, France sold almost 8 billion euros in longer-term bonds, again at reduced yields, adding to signs that pressure is easing on some of the euro zone governments struggling in the debt crisis.

France’s sales this year now account for around 15 percent of what it has said it needs in 2012. Spain has stepped sharply back from the borrowing danger zone since November when it had to pay an unsustainable 7 percent interest to place 10-year bonds. It is now paying around 5.5 percent on similar bonds and is no longer mentioned in the same breath with countries such as Greece and Portugal, who had to get bailed out by the European Union. Analysts, however, cautioned that investor demand for Spanish bonds was even stronger at auctions in December and January than at Thursday’s sale, and prices on the country’s debt fell right after the sale, indicating the party could be over. And although the financial crisis has eased, Spain is now sliding into its second recession in four years and the government is forcing through painful austerity measures that are only exacerbating a sky-high jobless rate of 23 percent.

That means Spain may end up issuing more bonds than it planned this year, which could bring tension back to its bond auctions.

“The impressive performance of Spanish paper comes amid a deterioration in the country’s economic fundamentals and a slide back into recession. This is undermining the credibility of Spanish fiscal policy and may lead to higher-than-expected bond issuance later this year,” said Nicholas Spiro at consultancy Spiro Sovereign Strategy.

He said the International Monetary Fund believed Spain is unlikely to trim its deficit to less than 6.8 percent of gross domestic product in 2012, which would force the Treasury to up its borrowing requirements later this year.