Spain debt costs fall, but still seen unsustainable

Tue Jul 17, 2012 6:46am EDT
 
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By Nigel Davies

MADRID (Reuters) - Spain's borrowing costs dropped on Tuesday, at the first sale of debt since the government announced a new austerity package, but not enough to suggest markets believe the country's finances are on a sustainable path.

Prime Minister Mariano Rajoy unveiled spending cuts and tax hikes worth 65 billion euros ($80 billion) over the next 2-1/2 years last week, in a bid to demonstrate that Madrid can curb its debts.

But market doubts about whether Spain can avoid a full-scale sovereign bailout have kept its debt costs elevated with 10-year yields again heading towards the seven percent tipping point.

Nonetheless, borrowing costs at Tuesday's short-term debt sale were sharply lower than a month ago.

The yield on the 12-month bill was 3.918 percent, down from 5.074 percent last month, which was its highest in 15 years.

The yield on the 18-month bill was 4.242 percent compared with 5.107 percent at auction in June, right after Spain sought a bailout for its ailing banks worth up to 100 billion euros.

"Yields have come down by nearly a percentage point, so that's not to be sniffed at, and there's room for them to fall further, but we need details of the bank bailout," said Orlando Green, strategist at Credit Agricole.

Euro zone finance ministers are due to discuss the terms of Spain's bank rescue on Friday at 1000 GMT, a spokeswoman for the chairman of the euro zone ministers, Jean-Claude Juncker, said.   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