Spain completed the final bond sale of the year with the threat of a credit rating downgrade, undermining the government’s efforts to convince investors the nation and its lenders can meet their refinancing needs in 2011.
Today’s auction of 10-year and 15-year bonds raised 2.4 billion euros ($3.2 billion), missing the maximum goal of 3 billion euros, after a surge in borrowing costs led the Treasury to reduce the usual target of as much as 4 billion euros. The yield on 10-year bonds rose five basis points after the auction to 5.56 percent as of 11:46 a.m. in Madrid.
Moody’s Investors Service said yesterday it may lower the country’s Aa1 rating less than three months after the previous cut. Spain’s central government, regional administrations and banks collectively require 290 billion euros of financing next year, leaving the country “susceptible to further episodes of funding stress,” the company said.
“Spain had to pay much higher yields for this auction, and that’s to be expected in the light of what Moody’s did earlier this week,” said Philipp Jaeger, a fixed-income economist at DZ Bank AG in Frankfurt.
The nation today sold 1.78 billion euros of 10-year bonds at an average yield of 5.446 percent, compared with 4.615 percent last time the securities were issued on Nov. 18, the Bank of Spain said today in Madrid. It also sold 618.7 million euros of 15-year debt at 5.953 percent, compared with 4.541 percent when the paper was last sold on Oct. 21.
Spain is prefunding for 2011 as it has covered this year’s needs, according to Salgado. The budget shows gross issuance of 192 billion euros for the central government next year, although asset sales announced on Dec. 1 may raise 14 billion euros to help reduce the potential borrowing. Even as Moody’s says the country will meet its budget-deficit goals for 2010 and 2011, the rating company highlighted the risks posed by the banks’ requirement to roll over 90 billion euros of debt.
“The sovereign is OK, in terms of debt dynamics and even going forward in terms of the debt trajectory, it’s the banking system that’s a problem,” said Mohit Kumar, a fixed-income strategist at Deutsche Bank AG in London.
The extra yield investors demand to hold Spanish 10-year bonds over German bunds rose nine basis points to 251 basis points at noon today in Madrid. That compares with a euro-era closing high of 283 basis points on Nov. 30. The cost of insuring Spanish debt against default fell 5.6 basis points to 318, according to CMA prices.
Spanish banks may provide some potential support for future bond auctions, as they have reduced holdings of government debt since June, which may leave them room to soak up new issuance. Lenders lowered their holdings of Spanish government debt by 15 percent to 131.9 billion euros in October from 155.6 billion euros in June, according to data from the Treasury. Their share of Spain’s debt shrank to 26 percent in October from 33 percent in June, while non-residents boosted their share to 48 percent from 43 percent.
“Reduced exposure by those institutions should ultimately be a good thing in terms of auction participation going forward,” said Sean Maloney, a fixed-income strategist at Nomura Holdings Inc. in London. “It probably leaves a bit of room for the traditional supporters of these auctions to come forward.”
Spanish banks also have reduced their dependence on funding from the European Central Bank, cutting borrowings to 61.1 billion euros in November, the lowest since January, from a peak of 130.2 billion euros in July, according to Bank of Spain data. Deputy Finance Minister Jose Manuel Campa said yesterday he doesn’t foresee “problems of market access” for lenders next year, while Spain hasn’t seen any “lack of appetite” for public debt and he doesn’t expect it to next year either.
The auction comes as European leaders gather in Brussels today to discuss the creation of a permanent mechanism to support countries with financing difficulties beginning in 2013 when the temporary facility set up in May expires. Amid concerns that the existing 750 billion-euro fund may not be big enough if more countries seek help, Germany is hardening its opposition to expanding the facility, shifting more pressure onto the ECB and its bond-buying program.
Moody’s analyst Kathrin Muehlbronner said in an interview yesterday that a bailout for Spain isn’t “likely,” though she declined to “rule it out.” Juan Jose Toribio, a professor at IESE business school and former head of financial policy in the finance ministry, puts the chances of Spain needing a bailout at 30 percent, rising to 50 percent if Portugal seeks help.
Moody’s threat to cut Spain’s rating came two weeks after the government announced a series of measures, including partial privatizations, benefits cuts and a reduction in taxes for small businesses, aimed at bolstering growth and slashing the deficit by 50 percent in two years. The Socialist government had already lowered public wages and announced a pension freeze in May after Greece’s near-default.
“What it means is that it doesn’t believe in the package of measures,” Toribio said. “It’s all about the date.”
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