Spain Struggles to Sell Debt

Ten-year yield moves above 7% after lackluster 5-year auction.

Spain’s five-year borrowing costs surged as the government braced for protests against spending cuts, while France paid record-low yields of less than 1 percent to sell similar securities.

Spanish five-year notes yielded an average 6.459 percent at auction today, compared with 6.072 percent a month ago. French yields for the same maturity fell to 0.86 percent, almost half of last month’s level. Spain sold debt as lawmakers debated spending cuts in Parliament, where police erected barriers and stood guard.

Spain, which asked other euro nations for 100 billion euros ($123 billion) of aid last month to bail out its banks, is fighting to maintain enough market access to be able to fund its budget deficit. Lawmakers in Germany, where borrowing costs have turned negative as investors opt for the safest assets, are set to vote on the Spanish bailout agreement today.

Spain’s 10-year benchmark bond yields surged through the 7 percent threshold that prompted sovereign bailouts in Greece, Ireland and Portugal. It traded at 7.025 percent at 12:45 p.m. in Madrid. While the Treasury sold 2.98 billion euros of notes, in line with its maximum target, demand for two-year securities was 1.9 times the amount sold, compared with 4.26 times at a sale last month.

“Nothing looks good,” Ioannis Sokos, a fixed-income strategist at BNP Paribas in London, said in a telephone interview. “Spanish banks have been much less aggressive in buying domestic bonds” as the effect of 1 trillion euros of unlimited three-year loans by the European Central Bank fades.

Spanish banks have been propping up the domestic bond market and increased their holdings in the first quarter as they channeled ECB funds into government debt. They scaled back in April and May, while non-resident investors also continued to reduce their holdings, Treasury data show.

Prime Minister Mariano Rajoy said yesterday the 65 billion euros of spending cuts and tax increases announced last week are necessary to prove to investors that Spain is a credible borrower. The measures, being debated in Parliament today, include an increase in sales tax, which Rajoy’s People’s Party had opposed, and reductions to jobless benefits, which Rajoy had pledged not to touch during the election campaign last year. Rajoy didn’t attend the debate.

“We are acting out of necessity, necessity determines the road to follow,” Budget Minister Cristobal Montoro told lawmakers. “That’s why some of our ideas have been left by the wayside.”


Protests, Strikes

The U-turn has prompted protests and strikes, and unions have called demonstrations across the country later today. Police erected protective barriers around Parliament, and guarded the emblematic city hall building with three riot vans.

Police stationed a riot wagon and six officers armed with handguns and batons outside the PP’s headquarters in central Madrid. On a bench along the street from Rajoy’s political base, a woman covered in dirt and surrounded by bags was eating yoghurt with her finger. An old man sat on the sidewalk next to a handwritten sign begging passersby for change.

Rajoy is implementing the fourth austerity package since coming to power in December, after the second recession since 2009 and a 25 percent jobless rate made his previous three rounds of austerity insufficient.

“This government can’t afford to choose between good and bad,” Rajoy said yesterday. “It has to choose between bad and worse.”


 Bloomberg News


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