Spain debt costs to stay high in wake of austerity plan

Mon Jul 16, 2012 7:07pm EDT
 
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By Nigel Davies

MADRID (Reuters) - Spain's borrowing costs are likely to stay high on Tuesday when it tests investor appetite for its debt for the first time since announcing more austerity last week, suggesting markets remain unconvinced it can avoid a European bailout.

Prime Minister Mariano Rajoy unveiled a package of savings and tax hikes worth 65 billion euros ($80 billion) over the next two and a half years, in a bid to demonstrate that Madrid can control its finances. But market doubts have kept its debt costs elevated.

Yields on the short-term debt, using secondary market pricing as a guideline, are likely to be sharply lower than the last time it was sold at auction in June - but still near euro-era highs.

The yield on the 12-month bill was around 3.5 percent in secondary markets on Monday, down from an average of 5.074 percent last month, which was its highest in 15 years.

On the 18-month bill the yield was around 4.0 percent compared with an average 5.107 percent at auction in June, right after Spain sought an up to 100 billion euro rescue plan for its ailing banks that fueled fears it could soon seek a full-scale state bailout.

"There are still massive risks that Spain will need a sovereign bailout," said Jo Tomkins, analyst at consultancy 4Cast.

"It's got to a point where it's not just about austerity. People question whether Spain will be able to grow its way out of recession and produce revenue," she said.

However, she expected the auctions to go well even if investors demand a stiff premium, forcing the Treasury to pay more than expected.   Continued...

 
A couple looks at the window of a closed store next to graffiti that reads "Thieves" on the wall of the savings bank Cajastur in Madrid June 11, 2012. REUTERS/Susana Vera