Spain Borrowing Costs Surge

First auction since bailout sees government paying most in eight years.

Spain’s borrowing costs surged at its first auction since becoming the fourth euro member to seek a bailout, with the Treasury paying the most for at least eight years to sell debt for one year.

The Treasury sold 2.4 billion euros ($3 billion) of 12- month bills at an average rate of 5.074 percent, 2.1 percentage points more than the 2.985 percent paid on May 14. It also sold 639.3 million euros of 18-month debt at 5.107 percent, compared with 3.302 percent last month, the Madrid-based Bank of Spain said today.

The euro area’s fourth-largest economy, which is due to sell 2 billion euros of bonds on June 21, is urging European authorities to act so it doesn’t lose access to financial markets. Its bonds have dropped to euro-era lows since requesting as much as 100 billion euros of aid to shore up its banks on June 9.

“The market is getting towards a distressed situation,” Harvinder Sian, a fixed-income strategist at Royal Bank of Scotland Plc in London. “There will be nerves ahead of the bond auction and we would expect to see most of it absorbed by the domestics.”

The Treasury aims to sell bonds maturing in 2014, 2015 and 2017 on June 21. Budget Minister Cristobal Montoro yesterday called on the European Central Bank to prop up the nation’s bond market as 10-year borrowing costs surged to more than 7 percent for the first time since the creation of the euro. That yield traded at 7.064 percent at 11:40 a.m. in Madrid, down from 7.105 percent before the sale and 7.158 percent yesterday.

Spanish banks hold 29 percent of the nation’s outstanding debt, up from 17 percent at the end of last year. Non-residents hold 37 percent, down from 50 percent at the end of 2011, Treasury data show.

Demand at the auction today for the 12-month securities was 2.16 times the amount sold, compared with 1.84 times last month. The ratio on the 18-month debt rose to 4.42 times from 3.23. The Treasury sold a total of 3.04 billion euros of the securities, just more than the 3 billion-euro maximum set for the auction.

Investors are concerned the nation may need further European aid as it has struggled to clean up lenders for three years. At the same time, the government needs to curb the euro area’s third-largest budget deficit just as the economy is mired in its second recession since 2009.

 

Bank Audit

As part of efforts to restore confidence, Prime Minister Mariano Rajoy’s government, in power since December, has commissioned an independent stress test of banks to help it determine how much of the 100 billion-euro European loan it will need to tap. The reports are due on June 21.

In a second test, four auditors will carry out a detailed assessment of lenders’ books. Those reports, initially due at the end of July, won’t be published until September, a person familiar with the plans said today. An official at the Economy Ministry, who asked not to be named, declined to comment on the timetable.

 

Bloomberg News

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