Spain Sells Bonds in First Test of Confidence in Rescue Fund: Euro Credit

Spain sold bonds today in the first test of whether Europe’s efforts to boost the firepower of its rescue fund are persuading investors to become more discriminating about which countries will avoid bailouts.

Spain sold 4.1 billion euros ($5.8 billion) of 30-year debt and 10-year securities, its first auction since European leaders agreed March 12 to increase the capacity of the fund. Demand rose versus the last time securities of similar maturity were offered Feb. 17, though the auction missed the maximum 4.5 billion-euro target. Spanish bonds were steady after the sale.

“It’s a fairly decent auction,” said Peter Schaffrik, head of European fixed-income strategy at RBC Capital Markets in London. “We are quite positive on tier-two countries which include Spain after the European summit. The fact that it didn’t go wrong is good.”

EU leaders attempting to end the year-long debt crisis that led Greece and Ireland to seek a bailout agreed to boost the effective capacity of its temporary rescue fund to the full 440 billion euros, while expanding enforcement of debt and deficit limits. The move heightened confidence that contagion won’t push Spain into a bailout, even as Moody’s Investors Service March 15 cut Portugal’s credit rating a second time in a year.

Spanish 10-year yields rose three basis points to 5.20 percent today and were little changed after the auction. The securities rallied to their highest in more than a month yesterday, widening the gap in yields with Portugal, Spain’s neighbor on the periphery.

“I expect a decrease in the contagion effect from small peripheries to Spain and Italy,” Ioannis Sokos, a fixed-income strategist at BNP Paribas SA in London, said before the auction. “We know that this is adequate, that there is a backstop for Spain if needed.”

Bid-to-Cover

The so-called bid-to-cover ratio for the 10-year debt was 1.81, compared with 1.54 last time securities of similar maturity were sold on Feb. 17.

The 10-year bonds were sold at a yield of 5.162 percent and the 30-year debt at 5.875 percent. Spain last sold 10-year bonds on Feb. 17 at a yield of 5.2 percent. The Treasury sold 30-year debt the same day at a yield of 5.96 percent.

The gap between Portuguese and Spanish 10-year yields widened yesterday to 233 basis points, the most since November, after Moody’s cut Portugal two levels to A3, four steps from so- called junk status. Moody’s also said the outlook remained negative, indicating another downgrade may follow. The spread shrank to 229 basis points today.

Spain, whose credit rating was cut to Aa2 by Moody’s last week, four steps above Portugal, is implementing the deepest austerity measures in at least three decades. It aims to slash the euro-region’s third-largest budget deficit from 9.2 percent last year to 6 percent this year, in line with France.

Portuguese Auction

Portugal faced higher borrowing costs at a sale of 12-month bills yesterday, selling the paper for a yield of 4.331 percent, up from 4.057 percent at the previous auction on March 2. Spain sold similar-maturity securities on March 15 at 2.128 percent, less than half the Portuguese rate.

Spain’s Treasury has sold almost a quarter of the gross 93.8 billion euros of bonds that it aims to sell this year, Treasury Director Soledad Nunez said in an interview on March 10. The country faces its first bond redemptions next month when 15.5 billion euros of debt matures.

Contagion Risk

Spain’s banks may prove more of a hazard to its prospects of avoiding a rescue than spillover from the other peripheral countries. The nation’s lenders, which have been hard hit by the collapse of the country’s real-estate market, face maturities of long-term debt of at least 22 billion euros in the first four months of the year, according to data compiled by Bloomberg.

“The contagion risk from Spanish banks is more threatening than the one from Portugal,” Sokos said. “The stress tests and the funding of the savings banks, especially in April when there is a spike in funding needs, are more of a risk.”

Spain is trying to restore investor confidence in lenders hit by the collapse of a decade-long housing boom and tightened capital requirements last month. To meet the new rules, eight savings banks and four other lenders must raise a combined 15.2 billion euros in new capital by September, the Bank of Spain said on March 10. Moody’s estimates the lenders will need as much as 50 billion euros.

Spanish lenders, which also have $86 billion in claims related to Portugal, have reduced their reliance on the European Central Bank as optimism Spain will avoid a rescue makes it easier for them to find private funds, central bank data shows.

Banks and savings banks reduced borrowings from the ECB for a second month in February to 49.2 billion euros from 53.1 billion euros in January. That compares with a peak of 130 billion euros in July, when international markets were closed to Spanish lenders. Portuguese banks raised their ECB borrowing in February for a third month, as concern Spain’s neighbor would need a bailout left its lenders shut off from private financing.

“The banking side remains a source of concern, but Spanish banks are back on the bond market and less and less dependent on ECB lending,” said Gilles Moec, an economist at Deutsche Bank in London.

To contact the reporters 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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