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Spain to Sell Bonds in Final Auction Before July Redemptions

Spain probably will pay more than at the last auction
Spain's deputy finance minister Jose Manuel Campa. Photographer: Daniel Acker/Bloomberg

Spain aims to sell as much as 3 billion euros ($3.8 billion) of debt today in its final bond auction before facing its biggest debt maturities for the rest of the year, marking the latest test of demand for securities of Europe’s high-deficit nations.

Spain probably will pay more than at the last auction. The yield on equivalent 15-year Spanish bonds in secondary markets reached 5.21 percent yesterday, compared with the 4.434 percent Spain paid at the previous auction on April 22. At that sale, demand was 1.79 times the amount sold, the Treasury said.

“The markets make their concession going into it and the auction process itself goes smoothly,” said Sean Maloney, a fixed-income strategist at Nomura International Plc in London.

Spain, which has 24.7 billion euros of debt maturing this month, is trying to convince investors it can cut the third- largest deficit in the euro region while strengthening its financial system. The government is hoping the publication of stress tests next week will improve lenders’ access to capital markets and reduce their dependence on the European Central Bank, while reassuring investors about the cost of any bailout.

Spanish lenders borrowed a record 126.3 billion euros from the ECB in June, up 48 percent from the previous month, according to data compiled by the Bank of Spain. That compares with a drop of 4 percent to 496.6 billion euros for euro-area lenders in the whole euro area.

Greek, Portuguese Sales

Spain’s bond auction comes after Greece sold Treasury bills on July 13 for the first time since accepting a three-year bailout plan from the EU in May after its borrowing costs surged. It secured an interest rate at the July 13 sale below the 5 percent charged on the emergency European loans. Portugal sold more debt than targeted in an auction yesterday, a day after Moody’s Investors Service cut the country’s credit rating, and Italy also sold 6.8 billion euros of bonds yesterday.

“The biggest threat to the auction would be a kind of saturation,” Maloney said.

The government has said it will have no trouble paying the July redemptions, as repayment coincides with a period of brisk tax revenue.

“The markets know perfectly well that we have been executing our funding strategy beyond our needs with no particular concern,” Deputy Finance Minister Jose Manuel Campa said in an interview June 22. As an example of the Treasury’s strategy, he said Spain didn’t have to go to the market to raise its portion of the emergency loan extended to Greece in May.

Financing Costs

Still, financing costs are rising, with the yield premium investors demand to hold Spain’s 10-year debt over comparable German bonds at 206.4 basis points, more than twice the average of the past 12 months.

Fitch Ratings cut Spain’s credit rating to AA+ on May 28, citing concerns about the economy’s ability to grow. Standard & Poor’s Ratings Services ranks Spain AA, while Moody’s Investors Service put the country’s rating on review for a possible downgrade on June 30, citing deteriorating growth prospects and the risk the government won’t meet its fiscal targets.

As a result of austerity measures including public wage cuts, a reduction in investment and a pension freeze, the government revised its growth forecast for next year to 1.3 percent from 1.8 percent. That’s still more than double the International Monetary Fund’s 0.6 percent forecast.

Even with Spain’s budget deficit at 11.2 percent of gross domestic product, more than three times the EU limit, its debt amounted to 53 percent of GDP last year, lower than in Germany and less than the euro-region average of 79 percent.

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