April 4 (Bloomberg) -- Prime Minister Mariano Rajoy said Spain’s situation is one of “extreme difficulty” and signaled that his budget cuts are less painful than a bailout would be, as demand for the nation’s debt slumped at an auction.
“Spain is facing an economic situation of extreme difficulty, I repeat, of extreme difficulty, and anyone who doesn’t understand that is fooling themselves,” Rajoy told a meeting of his People’s Party today in the southern coastal city of Malaga.
Rajoy raised the threat of an international bailout for the second time this week as he sought to defend the deepest austerity moves in at least three decades. While “no one likes” the budget presented last week, he said “the alternative is infinitely worse.”
Spain sold 2.59 billion euros ($3.4 billion) of bonds today, just above the minimum amount it planned for the auction and below the 3.5 billion-euro maximum target. The average yield on the bonds due in October 2016, which act as the five-year benchmark, rose to 4.319 percent from 3.376 percent at last month’s sale. Secondary-market yields rose to 4.48 percent.
Spain’s 10-year borrowing costs are approaching the levels seen in December, before the European Central Bank said it would make unlimited three-year loans to banks. Some of the 1 trillion euros taken in the so-called LTROs has been recycled into high-yielding government debt, which initially helped shave as much as 95 basis points off Spanish yields before they began to rise again in March.
Spanish borrowing costs have been going up since Rajoy announced on March 2 that his government wouldn’t comply with the deficit target the previous administration had set with the European Union. Euro-region finance ministers then settled on a target of 5.3 percent of gross domestic product for Spain. The country hasn’t met the EU’s 3 percent deficit ceiling since 2007, and the government forecasts debt to reach 79.8 percent of GDP this year, the highest in more than three decades.
“It’s back to reality now, the auction shows the LTRO effect has been exhausted and now demand for Spanish paper is becoming much more price sensitive,” Peter Chatwell, a London-based fixed-income strategist at Credit Agricole Investment Bank, said in a telephone interview.
Rajoy, in power since Dec. 21, first raised the specter of a bailout in a speech to senior party members on April 2. The risk of losing access to markets isn’t “theoretical” and “has already happened to some in the European Union,” he said.
Some local administrations in Spain have also been shut out of capital markets, preventing them from refinancing their debt, Rajoy said. The government has created a 35 billion-euro credit facility to help regions and town halls pay their bills and is demanding spending cuts in exchange.
The government, which failed to win a majority in a regional election in Andalusia on March 25 and faced a general strike four days later, is trying to defend the 2012 budget it sent to Parliament yesterday. The plan pledges more than 27 billion euros in deficit reduction to cut 3.2 percentage points from a budget shortfall that reached 8.5 percent of GDP last year. The plan includes an amnesty for tax-evaders and higher corporate taxes, while slashing ministries’ spending by 17 percent.
The budget sets aside almost 29 billion euros for interest payments in 2012, up from 22 billion euros last year. That’s about the same amount it plans to spend on the unemployed, as the jobless rate approaches 24 percent, the highest in the European Union.
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