Spain auction yields rise as bank reform, Greece weigh

Mon May 14, 2012 5:53am EDT
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By Paul Day

MADRID (Reuters) - Spain's short-term debt costs rose on Monday and its benchmark premium over German bonds hit a euro era high, with Madrid's newest banking sector clean-up failing to allay the concerns of investors also unnerved by political deadlock in Greece.

The Treasury raised 2.9 billion euros ($3.8 billion) in 12- and 18-month Treasury bills, just under the top of the targeted range. Yields on the shorter paper rose by around a seventh from the last primary auction in April to just under 3 percent.

Addressing a problem at the heart of the euro zone debt crisis, Spain's government on Friday announced its second financial sector reform in three months to calm market fears that the country's banks face an unbridgeable funding gap.

The lenders were told to put aside 30 billion euros in funds to cover soured loans to property developers, above and beyond 54 billion euros of provisioning against toxic real estate assets ordered in February.

But with the country struggling to meet deficit reduction targets and facing recession and massive unemployment, investors doubted that a long-term solution had been found.

"Slightly disappointing couple of auctions, with a weak cover in both and shy of the maximum target. In the current environment in Spain in the banking sector and the extra provisions being asked, these auctions are not really a great source of confidence for the market," said Mark Miller, economist at Capital Economics.

The premium investors demand to hold ten-year Spanish over the equivalent Bund to its highest level since the introduction of the euro on Monday at around 483 basis points.

European shares also traded sharply lower as Greece's failure to form a government left the country's future membership of the euro zone uncertain.   Continued...