Spain Struggles to Sell Debt as French Yields Fall to Record

Spain’s five-year borrowing costs surged as the government pushed through spending cuts in the face of public protests, while France paid record-low yields of less than 1 percent to sell securities of the same maturity.

Spanish five-year notes yielded an average 6.459 percent at auction today, up from 6.072 percent a month ago. French yields fell to 0.86 percent, almost half last month’s level. Prime Minister Mariano Rajoy, who didn’t turn up to defend his cuts in parliament, secured passage of the plan with 180 votes, indicating none of the opposition in the 350-seat chamber supported it.

The premier, who asked other euro nations for as much as 100 billion euros ($123 billion) last month to bail out banks, is fighting to maintain access to capital markets. Lawmakers in Germany, where borrowing costs have turned negative as investors opt for the safest assets, are set to vote on the Spanish bailout agreement today.

“The danger to the financial sector in Spain can turn into danger for the financial stability of the euro area,” German Finance Minister Wolfgang Schaeuble told lawmakers in Berlin today as they prepared to vote on aid to Spain.

10-Year Yields

Spain’s 10-year benchmark bond yields surged through the 7 percent threshold that prompted sovereign bailouts in Greece, Ireland and Portugal. The debt traded at 7.018 percent at 3:22 p.m. in Madrid. While the Treasury sold 2.98 billion euros of notes, in line with its maximum target, demand for two-year securities was 1.9 times the amount sold, compared with 4.26 times at a sale last month.

“Nothing looks good,” Ioannis Sokos, a fixed-income strategist at BNP Paribas (BNP) in London, said in a telephone interview. “Spanish banks have been much less aggressive in buying domestic bonds” as the effect of 1 trillion euros of unlimited three-year loans by the European Central Bank fades.

Spanish banks have been propping up the domestic bond market and increased their holdings in the first quarter as they channeled ECB funds into government debt. They scaled back in April and May, while non-resident investors continued to reduce their holdings, Treasury data show. The ECB has also resisted calls from Rajoy to lend money to Spain.

Italian Approval

The Italian Parliament today gave final approval to the European Stability Mechanism, the euro-region’s permanent bailout fund. The emergency lender is still being held up by a legal challenge in Germany’s constitutional court.

Rajoy said yesterday the 65 billion euros of spending cuts and tax increases announced last week are necessary to prove to investors that Spain is a credible borrower. The measures include an increase in sales tax, reductions in jobless benefits and a pay cut for public workers.

“There’s no money in the public coffers,” Budget Minister Cristobal Montoro told lawmakers today as Treasury officials prepared to offer government debt to investors at the auction. “There’s no money to pay for public services.”

Rajoy campaigned against raising sales tax in last year’s election and pledged not to touch jobless benefits. The U-turns have prompted protests and strikes. Unions called demonstrations across the country later today. Police erected barriers around Parliament and guarded the emblematic city hall building with three vans.

Street Protests

“Taking to the streets is about defending Spain and defending the rights of Spaniards,” Tomas Gomez, leader of the Socialists in Madrid, said in an e-mailed statement. “Rajoy never fronts up. He’s leading into absolute ruin and he still won’t face up to Parliament.”

Police stationed a riot wagon and six officers armed with handguns and batons outside the PP’s headquarters in central Madrid. On a bench along the street from Rajoy’s political base, a woman covered in dirt and surrounded by bags was eating yogurt with her finger. An old man sat on the sidewalk next to a handwritten sign begging passersby for change.

“They are sacrificing the rights of the people, of the citizens to rescue the privately owned banks,” Francisco Jorquera, a lawmaker from the Galician Nationalist Party, told reporters.

Rajoy is implementing the fourth austerity package since coming to power in December, after the second recession since 2009 and a 25 percent jobless rate made his previous three rounds of austerity insufficient.

“We are acting out of necessity, necessity determines the road to follow,” Montoro said. “That’s why some of our ideas have been left by the wayside.”

To contact the reporters on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net; Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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