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Spain bond auction: Borrowing costs edge up Spain bond auction: Borrowing costs edge up
(about 3 hours later)
There was strong demand for Spanish bonds at an auction on Thursday, which was seen as a key test of the country's ability to raise funds, but it had to pay a higher interest rate.There was strong demand for Spanish bonds at an auction on Thursday, which was seen as a key test of the country's ability to raise funds, but it had to pay a higher interest rate.
The rate on the 10-year bonds was 6.044%, up from the 5.743% paid when bonds were last sold in April.The rate on the 10-year bonds was 6.044%, up from the 5.743% paid when bonds were last sold in April.
Spain sold 2.1bn euros ($2.6bn; £1.7bn) in medium and long-term bonds.Spain sold 2.1bn euros ($2.6bn; £1.7bn) in medium and long-term bonds.
It comes as European authorities are said to be working on a way to help Spain's troubled banking sector. Meanwhile a leading ratings agency downgraded its assessment of Spain's creditworthiness.
Fitch cut its rating on Spain's government debt by three notches to "BBB", a sign it thinks its ability to honour its debts has weakened.
European authorities are said to be working on a way to help Spain's troubled banking sector.
UK Chancellor George Osborne said: "I know they are working very hard on an imminent solution."UK Chancellor George Osborne said: "I know they are working very hard on an imminent solution."
"I am optimistic that people are working hard on a solution, and a solution, I think, is coming," he told the BBC."I am optimistic that people are working hard on a solution, and a solution, I think, is coming," he told the BBC.
Borrowing costs had not been as high as feared due to these efforts in Brussels to try to find a way to help Spain, analysts suggested.Borrowing costs had not been as high as feared due to these efforts in Brussels to try to find a way to help Spain, analysts suggested.
Crisis jargon buster Use the dropdown for easy-to-understand explanations of key financial terms:
AAA-rating The best credit rating that can be given to a borrower's debts, indicating that the risk of borrowing defaulting is minuscule. Glossary in full		 Crisis jargon buster Use the dropdown for easy-to-understand explanations of key financial terms:
AAA-rating The best credit rating that can be given to a borrower's debts, indicating that the risk of borrowing defaulting is minuscule. Glossary in full
Spain remains the focus of international concerns. In other developments:Spain remains the focus of international concerns. In other developments:
'Prohibitive rates''Prohibitive rates'
Amid the rumours and speculation, the key question persists: How is the Spanish government going to raise the money to bail out Spain's troubled savings banks?Amid the rumours and speculation, the key question persists: How is the Spanish government going to raise the money to bail out Spain's troubled savings banks?
The news from this latest Spanish government debt auction is both good and bad.The news from this latest Spanish government debt auction is both good and bad.
Good because demand was high, evidence that the Spanish treasury can raise money on the markets if it needs to. But bad because the borrowing rates went up since the last auction and sit at levels which many financial experts believe are not sustainable in the longer term.Good because demand was high, evidence that the Spanish treasury can raise money on the markets if it needs to. But bad because the borrowing rates went up since the last auction and sit at levels which many financial experts believe are not sustainable in the longer term.
But 2bn euros is a fraction of the amount reportedly needed by the Spanish Government to deal with the debt held by Spanish banks.But 2bn euros is a fraction of the amount reportedly needed by the Spanish Government to deal with the debt held by Spanish banks.
A conservative estimate for that figure would be 40bn euros. But some think it could be much higher and that's why many believe some form of international assistance is needed to shore-up Spain's banks.A conservative estimate for that figure would be 40bn euros. But some think it could be much higher and that's why many believe some form of international assistance is needed to shore-up Spain's banks.
In the Spanish bond auction, there was demand for 3.3 times as many 10-year bonds as were available on Thursday.In the Spanish bond auction, there was demand for 3.3 times as many 10-year bonds as were available on Thursday.
The Treasury sold 638m euros of 2-year bonds at a yield of 4.335% and 825m euros of four-year bonds at 5.353%, in addition to the 611m euros of benchmark 10-year bonds.The Treasury sold 638m euros of 2-year bonds at a yield of 4.335% and 825m euros of four-year bonds at 5.353%, in addition to the 611m euros of benchmark 10-year bonds.
The yield on Spanish 10-year bonds from previous auctions, known as the secondary market, fell below 6.1% in trading on Thursday, having recently risen above 6.7%.The yield on Spanish 10-year bonds from previous auctions, known as the secondary market, fell below 6.1% in trading on Thursday, having recently risen above 6.7%.
"Although the yield on the 10-year is just a tad below secondary market levels, these are prohibitive rates which underscore the dramatic deterioration in Spain's perceived creditworthiness," said Nicholas Spiro of Spiro Sovereign Strategy."Although the yield on the 10-year is just a tad below secondary market levels, these are prohibitive rates which underscore the dramatic deterioration in Spain's perceived creditworthiness," said Nicholas Spiro of Spiro Sovereign Strategy.
"If it wasn't for its banks' continued support at auctions, Spain would be unable to sell its debt.""If it wasn't for its banks' continued support at auctions, Spain would be unable to sell its debt."
France also held a bond auction on Thursday, but its cost of borrowing fell.France also held a bond auction on Thursday, but its cost of borrowing fell.
It raised 7.8bn euros in an auction of long-term bonds. For the 10-year bonds it paid an interest rate of 2.46%, down from 2.96% at its last auction a month ago.It raised 7.8bn euros in an auction of long-term bonds. For the 10-year bonds it paid an interest rate of 2.46%, down from 2.96% at its last auction a month ago.
Bailout decisionBailout decision
Spain is keen to avoid a full international bailout, which would be politically damaging and come with strict economic conditions.Spain is keen to avoid a full international bailout, which would be politically damaging and come with strict economic conditions.
It favours a bailout targeted directly at its banks, rather than at central government.It favours a bailout targeted directly at its banks, rather than at central government.
On Monday, the International Monetary Fund will be releasing a report into Spain's banks, which will say they need an extra 40bn to 80bn euros of capital, according to Spanish newspaper reports. That is on top of the 80bn the country has already said it needs to raise this year. On Monday, the International Monetary Fund will be releasing a report into Spain's banks, which will say they need an extra 40bn to 80bn euros of capital, according to Spanish newspapers.
There are also reports due from two consulting firms into the balance sheets of Spain's banks. It is the first of a number of reports which the Spanish government is waiting for before it decides how to recapitalise its banks.
The Spanish government is waiting for the reports before it decides how to recapitalise its banks. Ratings agency Standard and Poor's said Spain's financial system could absorb up to 60bn euros of losses on bad loans.
But if needs to find 80-112bn euros, then the banks would need government or EU aid, it said.
Political unionPolitical union
Ahead of her meeting with David Cameron, Chancellor Merkel talked about the need for Europe to have more power.Ahead of her meeting with David Cameron, Chancellor Merkel talked about the need for Europe to have more power.
"We need not just a currency union; we also need a so-called fiscal union, more common budget policies," she said."We need not just a currency union; we also need a so-called fiscal union, more common budget policies," she said.
"We need above all a political union. That means that we must, step by step as things go forward, give up powers to Europe.""We need above all a political union. That means that we must, step by step as things go forward, give up powers to Europe."
Mr Cameron said no one leader could be "singled out" for responsibility and added that a "whole series of measures", both short and longer term, were needed.Mr Cameron said no one leader could be "singled out" for responsibility and added that a "whole series of measures", both short and longer term, were needed.
"We've always said there's some urgent action to stabilise markets which is about building firewalls, recapitalising banks."We've always said there's some urgent action to stabilise markets which is about building firewalls, recapitalising banks.
"There's also important ongoing action to make sure we have plans, credible plans to deal with debt and deficit, but also there is the need for structural reform to get growth back in Europe and we support those structural reform plans," he said, as he prepared to meet his German counterpart."There's also important ongoing action to make sure we have plans, credible plans to deal with debt and deficit, but also there is the need for structural reform to get growth back in Europe and we support those structural reform plans," he said, as he prepared to meet his German counterpart.