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Spain Pays More to Borrow Than Greece as Rajoy Appeals to Europe

Prime Minister-Elect Mariano Rajoy
Prime Minister-elect Mariano Rajoy and his pro-business People’s Party were greeted with a surge in borrowing costs since ousting the ruling Socialists in the general elections. Photographer: Denis Doyle/Bloomberg

Spain paid more than Greece and Portugal to sell three-month bills as the newly elected People’s Party called for a European agreement to “save” the nation’s debt, saying the country can’t afford 7 percent interest rates.

Spain’s three-month borrowing costs doubled as it sold bills at an average yield of 5.11 percent, more than twice the rate at the previous auction a month ago. The Treasury paid more than the 4.63 percent for 13-week bills sold Nov. 15 by Greece, which received a European Union-led bailout last year. Portugal paid 4.895 percent on three-month bills the following day.

Maria Dolores de Cospedal, the deputy leader of Spain’s People’s Party which ousted the ruling Socialists on Nov. 20, yesterday called for a euro-region accord to “save and guarantee the solvency” of Spain’s 650 billion-euro ($881 billion) debt. Spain can’t afford to “continue financing itself at 7 percent,” she said, referring to the yield on 10-year debt that led Greece, Portugal and Ireland to seek EU aid.

Prime Minister-elect Mariano Rajoy told German Chancellor Angela Merkel in a phone call yesterday that “countries that meet their obligations and responsibilities must be helped by European institutions,” Cospedal said. The European Commission yesterday said it had no knowledge of any Spanish request for aid or plans to seek it.

Germany dismissed calls for Europe to come to Spain’s assistance. “We don’t have any new bazooka to pull out of the bag,” said Michael Meister, finance spokesman in parliament for Merkel’s Christian Democratic bloc.

Borrowing Costs

The yield on Spain’s 10-year benchmark bond rose 5 basis points to 6.6 percent at 11:55 a.m. in Madrid, nearing the euro-era high of 6.78 percent reached on Nov. 17. The gap between Spanish and German 10-year borrowing costs rose 3 basis points to 467 basis points.

“It’s still a question of a liquidity crisis more than a debt sustainability issue,” Gianluca Salford, a fixed-income strategist at JP Morgan Chase Bank in London, said in a telephone interview. “Lower prices and higher yields are scaring investors rather than attracting new demand.”

Rajoy has been greeted with a surge in borrowing costs since his landslide victory left his People’s Party with the biggest parliamentary majority in almost 30 years. The Socialists, who had ruled since 2004, became the fifth European government to be toppled by fallout from the sovereign-debt crisis. Italy and Greece appointed new prime ministers this month, while voters in Ireland and Portugal fired their leaders earlier this year.

EU Meetings

While Rajoy won’t take office until the second half of next month and hasn’t announced his Cabinet, Europe’s other new leaders are rushing to bring order to their nation’s finances and obtain political support in Europe. Greek Prime Minister Lucas Papademos today meets with Jean-Claude Juncker, who chairs meetings of euro-area finance ministers. Italian Prime Minister Mario Monti meets with EU President Herman Van Rompuy in Brussels.

Fitch Ratings said today that Spain’s new government will need to take “additional measures” beyond those announced by the Socialists to meet its deficit targets, and the People’s Party’s election victory provides a “window of opportunity.”

Rajoy inherits a stalled economy with a 23 percent jobless rate, a banking system that’s facing a funding squeeze and a deficit of more than twice EU’s limit of 3 percent of gross domestic product. Spain has pledged to reduce the shortfall to 4.4 percent next year from more than 6 percent this year.

Austerity Vote

Spaniards have “voted for austerity,” Rajoy told senior party members yesterday. It is the country’s “national duty to strengthen the euro,” he said.

The Spanish Treasury today also sold six-month bills at 5.227 percent, up from 3.302 percent last month. The last time Spain sold bonds on Nov. 17 it paid almost 7 percent for securities maturing in January 2022, the most since it joined the euro in 1999.

The yields in today’s auctions were the highest since 2004, while demand for the three-month debt was 2.85 times the amount sold, compared with 3.07 times in October. The bid-to-cover for the six-month paper was 4.92, compared with 2.59 last time.

“The demand has been good as always, indicating our robust ability to access the market,” said a Treasury official, who declined to be named in line with policy. “Despite tensions, there’s still appetite for Spanish public debt.”

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