MADRID – Spain’s borrowing costs soared Tuesday in an auction of short-term debt, suggesting investors remain cautious about the country’s financial future despite a convincing electoral win this week by conservatives bent on deficit-cutting austerity.
The Treasury sold €2.98 billion ($4 billion) in 3- and 6-month bills, which was roughly the agency’s target. But the average interest rate on the 3-month bills jumped to 5.1 per cent from 2.3 per cent in the last such auction in Octover, and to 5.2 per cent on the 6-month bills, compared with 3.3 per cent last time.
Demand was nevertheless good, with bids almost three times the amount offered for the 3-month bills, and nearly 5 for the 6-month bills.
Last week Spain had to offer an average interest rate of nearly 7 per cent on 10-year bonds at an auction, a euro-era record. An auction of 12- and 18-month bonds last week also went badly, with Spain also forced to offer significantly higher interest rates to investors.
The centre-right Popular Party has had no time to savour its electoral victory over the Socialists, having to immediately address grueling task of reassuring investors worried about Spain’s grim prospects for economic growth and getting nearly 5 million unemployed – 21.5 per cent of the work force – back to work.
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Doubts that Spain will be able to make it are behind the rise in its borrowing rates. On the secondary market, where bonds are bought and sold after they are issued, the yield on Spanish benchmark 10-year bonds stood at 6.5 per cent, roughly the same as the day after the election and not far from the 7 per cent level that is considered unsustainable over the longer term.
The future prime minister, Mariano Rajoy, has said he will maintain the purchasing power of retirement pensions but other than that, any kind of government spending is liable for cuts. However, Rajoy has kept the country and the financial community largely in the dark over his specific plans. He will not be sworn in until mid-December.
Standard & Poor’s Ratings Services said Monday it was maintaining its AA- rating with a negative outlook for Spain despite the conservative win.
Meanwhile, in a sign of the fragility of some of Spain’s lender, the central bank announced late Monday that it had seized a small bank, Banco de Valencia, because of problems with solvency and liquidity stemming from overexposure to the real estate bubble largely blamed for Spain’s economic collapse. It is the fourth such seizure of a banking entity since 2009.
The Bank of Spain said it was injecting €1 billion in capital into Banco de Valencia S.A. and opening up a €2 billion credit line for it.
Ciaran Giles contributed to this report.