Spain borrowing costs dive

Tue Dec 20, 2011 8:47am EST
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By Paul Day

MADRID (Reuters) - Short-term financing costs for euro zone struggler Spain more than halved on Tuesday as banks lapped up debt at an auction, with much of the purchasing power said to come from cut-rate money to be lent by the European Central Bank.

The euro zone's debt dilemma remained on view in Greece, however, where borrowing costs rose to 4.68 percent for just 3 months. The Greek debt agency old 1.3 billion euros ($1.7 billion) of the short-term debt.

Demand for the 3- and 6-month Spanish Treasury bills was high, with more than 18 billion euros offered for 5.6 billion euros sold, above the targeted amount of 3.5 billion to 4.5 billion euros.

"This is another impressive auction from Spain and an early Christmas present for the Treasury," said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London

"Spain is by no means out of the woods. The Spanish economy is still flat on its back and Spain is threatened with yet more credit rating downgrades."

Economists believe Spain is already in its second recession in three years and the sluggish economy and high deficit have put it at centre of the euro zone debt crisis. The main concern is that if it needs a bailout it would stretch available funds and political will.

Rating agency Fitch said last week a comprehensive solution to the euro zone debt crisis is beyond the region's reach and warned six of its economies, including Italy and Spain, could be hit with credit downgrades in the near future.

Fiscal prudency by Spain's outgoing Socialists and the promise of further cuts by the incoming centre-right government has helped ease jitters and draw a line between it and the euro zone's third largest economy Italy.   Continued...