Spain borrowing costs ease at auction, relief may be brief

Thu Sep 20, 2012 12:34pm EDT
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By Nigel Davies

MADRID (Reuters) - Spain's 10-year borrowing costs fell to their lowest level since January in an auction on Thursday, although the relief from market pressure may be short lived as Prime Minister Mariano Rajoy hesitates over seeking an international bailout.

The yield on the benchmark 2022 bond fell to 5.666 percent with almost three times more offered than the amount sold. Demand was also strong for a three-year bond. The Treasury sold a total of 4.8 billion euros ($6.27 billion) in the bonds, above its target.

Investors have been encouraged by the European Central Bank's decision to buy the debt of troubled governments such as Spain's, provided they first request help from the euro zone's rescue funds.

Such a bailout may bring demands for more unpopular austerity, and Rajoy has repeatedly said he is studying an aid request but does not want Europe to dictate conditions.

Markets expect that he will be pushed into a request sooner rather than later, as borrowing costs may start rising again if the ECB purchases fail to materialize.

"The relaxation of the markets is temporary, and if investors start thinking Spain is moving away from a rescue, that would be negative," said Soledad Pellon of IG Markets in Madrid.

Spain is at the heart of the euro zone debt crisis, now in its third year, with investors worried it will not be able to bring down its public deficit and control its debt due to a recession.

The bulk of the debt sold, or 3.9 billion euros, was in the shorter-dated bond, which was in high demand because it would be eligible for purchase by the ECB if Spain asks for a rescue, indicating markets are betting on Spain getting aid.   Continued...