Spanish Economy Sees Renewed Investor Confidence
September 21st, 2010
In a further sign of renewed investor confidence in Spain’s economy, the government Thursday raised four billion euros in long-term bond auctions at lower interest rates than previously.
The treasury said it sold 1.28 billion euros (1.66 billion dollars) in 31-year bonds at an average yield — or return — of 5.077 percent, down from 5.908 percent at the last sale on June 17.
It raised 2.72 billion euros of 10-year bonds at an average yield of 4.144 percent, down from 4.83 percent at the previous auction on July 6.
The amount raised was the maximum target for the auction amid strong demand for buying in Spain.
The auction was 2.1 times oversubscribed for the 31-year issue and 2.32 times for the 10-year bonds.
The successful Spanish bond sale boosted the euro against the dollar on currency markets.
It also pushed down the spread on Spanish government bonds over German bunds — a key indicator of market confidence — to 173.3 basis points just after the sale from 175.7 basis points on Wednesday. The spread had hit a eurozone high of 278 basis points in mid-June just after the Greek debt crisis roiled the financial markets.
Markets have been jittery over Spain’s high public deficit, which peaked at 11.2 percent of gross domestic product last year, fearing the country could suffer the same fate as Greece which needed a bailout from the European Union.
But these concerns have gradually eased since socialist Prime Minister Jose Luis Rodriguez Zapatero’s government earlier this year implemented the sharpest spending cuts since Spain returned to democracy following the death of dictator Francisco Franco in 1975.
The cuts aim to bring the public deficit down to 6.0 percent of GDP in 2011 and to the eurozone limit of three percent in 2013 with measures including cuts to civil servants’ wages, a Spanish sales tax increase and a freeze on pensions.
The cutbacks have been seen as a policy U-turn by the unions which have called a general strike for September 29 — the first since Zapatero came to power in 2004.
Government bonds are issued with a fixed annual return or interest, called the coupon, which does not change during the life of the bond.
As perceptions about the risk of the bond change, its price rises or falls, automatically changing the fixed cash return as a percentage of the new price.
In another sign of growing investor confidence in Spain, the nation’s banks — which were squeezed out of wholesale financial markets earlier this year — cut their borrowing from the European Central Bank in August.
Borrowing by the country’s banks during the month fell by 15.7 percent over the July figure, a record high, to 109.8 billion euros, its first drop since April, according to ECB figures.
The decline in borrowing from the ECB followed the release of stress tests at the end of July that showed Spain’s banking sector was largely healthy.
All eight major Spanish banks passed the EU’s bank stress tests on their ability to weather a crisis although five out of 19 regional lenders failed.
Story from AFP
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