Spanish Bond Sale Wins Breathing Space From Portugal Auction: Euro Credit
Spain Wins ‘Breathing Space’ From Portugal Auction
Jock Fistick/Bloomberg
Jose Luis Rodriguez Zapatero, Spain's Prime Minister, opened the door to using more public money to bolster lenders on Jan. 11, saying they had to improve their capital structure “as soon as possible.” He said banks can use the state’s rescue fund until their access to private financing improves.
Jose Luis Rodriguez Zapatero, Spain's Prime Minister, opened the door to using more public money to bolster lenders on Jan. 11, saying they had to improve their capital structure “as soon as possible.” He said banks can use the state’s rescue fund until their access to private financing improves. Photographer: Jock Fistick/Bloomberg
Jan. 13 (Bloomberg) -- Julian Callow, chief European economist at Barclays Capital, discusses the Portugese and Irish economies. He talks with Francine Lacqua on Bloomberg Television's "On The Move." (Source: Bloomberg)
Spain’s sold bonds for the first time this year, buoyed by Portugal’s success selling debt yesterday and European efforts to bolster the region’s sovereign-bailout fund.
Spain sold 3 billion euros ($3.9 billion) of five-year bonds, meeting its target, at an average yield of 4.542 percent, lower than secondary-market yields of 4.630 percent. Italy, the euro region’s second-most indebted nation, aims to issue as much as 6 billion euros of debt due in 2015 and 2026 today.
The yield on Spain’s benchmark 10-year bond reached the highest in more than a decade this week on concern Europe’s debt crisis was spreading and Portugal would follow Greece and Ireland in seeking European Union aid. Portugal’s 10-year borrowing costs fell at a sale of 1.25 billion euros of bonds yesterday, as European leaders moved to cobble together a package of new measures to stop the contagion.
“The auction went well” today, said Chiara Cremonesi, a fixed income strategist at Unicredit Bank AG in London. “Spain managed to sell at the top of the announced range, attracting stronger demand than in November.”
The gap between Spanish and German borrowing costs narrowed to 235 basis points from 240 basis points yesterday and a euro-era high of 298 basis points on Nov. 30. Spain’s benchmark Ibex 35 stock index gained 2 percent, extending yesterday’s 5.4 percent surge, the biggest since May 10.
‘So Short’
“Market participants got so short and nervous ahead of the Portuguese auction that now we’ve probably hit another pocket of breathing space,” said Phyllis Reed, head of fixed-income research at Kleinwort Benson Private Bank in London. “It should make the Spanish auction a bit easier.”
European governments are considering aid for Portugal, debt buybacks and lower interest rates on loans from the region’s bailout facility as part of a package to quell the financial crisis, according to two people with direct knowledge of the talks. Euro-area finance ministers will discuss elements of the package next week at a meeting in Brussels. The European Commission is considering a proposal to double the size of the 750 billion-euro bailout fund, Expansion reported today, citing people it didn’t identify.
The Spanish bond market also got support yesterday from Chinese Vice Foreign Minister Fu Ying who said in London that the country has bought Spanish debt and will continue to do so, reiterating comments made last week by Vice Premier Li Keqiang.
Spain’s Socialist government, which faces its first bond redemptions in April, is trying to prove to investors it can slash the region’s third-largest deficit to 6 percent of gross domestic product this year from 9.3 percent in 2010, and shore up its struggling savings banks. The country faces repayments of 15.5 billion euros in April, data compiled by the Treasury show.
Open Door
Prime Minister Jose Luis Rodriguez Zapatero opened the door to using more public money to bolster lenders on Jan. 11, saying they had to improve their capital structure “as soon as possible.” He said banks can use the state’s rescue fund until their access to private financing improves. The end of Spain’s 10-year real estate boom resulted in about 1 million unsold properties, leaving the savings banks, which account for almost half the nation’s lending, hobbled with bad loans.
Spain’s public debt burden, at 64 percent of output last year, is lower than the euro-region average, even as the country has among the highest private debt loads.
Spanish lenders may require 25 billion euros to recapitalize, including the 11 billion euros that the state rescue fund has already committed, Moody’s Investors Service estimates in its so-called base-case scenario. Moody’s has Spain’s Aa1 credit rating on review for a possible downgrade.
Portuguese Ties
The nation is at risk of higher borrowing costs depending on whether Portugal is forced to seek a European rescue, just as spreads blew out after the Greek and Irish rescues. Banks in Spain had $78 billion in foreign claims with their Iberian neighbor as of last June, according to the Bank for International Settlements.
The gap between Portuguese and German borrowing costs fell to 371 basis points from 374 basis points yesterday. The cost of insuring Portuguese debt declined yesterday to 508.46 basis points from 535.71, according to CMA prices for credit-default swaps.
Portuguese Prime Minister Jose Socrates said yesterday the country doesn’t need external help and said the bond auction was a “success from any angle.” Bank of Portugal Governor Carlos Costa said the auction was a “signal of greater confidence from markets in the ongoing adjustment program of the Portuguese economy.”
To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net
To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net
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