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Rajoy Risks Bailout Yields in Trial of Spain’s Funding

Prime Minister Mariano Rajoy
Prime Minister Mariano Rajoy said yesterday that Spain faces the “serious risk” of losing access to debt markets and called on European institutions for support. Photographer: Jock Fistick/Bloomberg

May 17 (Bloomberg) -- Spain sold the maximum amount of notes targeted today as borrowing costs rose and 10-year bond yields approached levels that drove nations including Greece and Portugal into bailouts.

Spain sold 2.49 billion euros ($3.2 billion) of debt as the yield on notes maturing in July 2015 rose to 4.876 percent from 4.037 percent when they were last auctioned two weeks ago. Spanish 10-year bond yields eased after the auction to 6.334 percent, remaining near the 7 percent mark that pushed Greece, Ireland and Portugal toward European rescue packages.

The auction “fits the recent pattern that the Spanish Treasury is able to get its supply away, but at an ever-increasing cost,” said Richard McGuire, a senior fixed-income strategist at Rabobank International in London. “This points to the fact we’re running out of road of debt sustainability for Spain. Ultimately, some form of outside intervention will be necessary.”

Prime Minister Mariano Rajoy said yesterday that Spain faces the “serious risk” of losing access to debt markets and called on European institutions for support. The Treasury is trying to sell bonds after foreign investors’ share of the nation’s debt fell to the lowest since 2003. Spanish banks picked up the slack with the help of emergency funding from the European Central Bank.

Potential ‘Accident’

“Spain is potentially the biggest euro-zone accident waiting to happen,” said Neil Williams, chief economist at Hermes Fund Management in London. “Unless there is a sudden and sustainable improvement in Spain’s underlying competitiveness, the next round of euro-zone governments’ support will have to stretch beyond the debtor nations currently on investors’ radars.”

Deputy Economy Minister Fernando Jimenez Latorre said today that Spain deserves support for its bonds in recognition of its efforts to cut the budget deficit and overhaul the shrinking economy. The ECB has no plans for immediate actions as it conducts a comprehensive review of all its policy tools, two euro-area officials said yesterday.

“We are doing everything necessary in terms of budget adjustments and reforms, and we understand there should be a certain reaction from the ECB,” Jimenez Latorre told reporters in Madrid.

Confidence Game

Before today’s auction, Spain had already sold 53 percent of its planned medium and long-term issuance for this year, according to the Economy Ministry. It also sold notes today maturing in January 2015 at an average rate of 4.375 percent and April 2016 bonds at a yield of 5.106 percent.

“Spain, once again, is where the confidence game is played,” said Sebastian Paris Horvitz, chief market strategist at HSBC Private Bank Suisse in Geneva. “A circuit breaker to end the current negative spiral is needed, given the pressure on Spain.”

Foreign investors cut their holdings of Spanish debt to 219.6 billion euros as of the end of March, or 37.5 percent of the total, compared with 281.4 billion euros, or 50 percent, at the end of last year, data from the Treasury show. Spanish banks increased their holdings to 170.6 billion euros from 94.4 billion euros after the ECB offered banks unlimited funds for three years.

The Frankfurt-based central bank may need to take additional measures to ease Spanish yields, said Peter Goves, an analyst at Citigroup in London.

Credible Backstop

“In our view, the ECB remains the only credible backstop to arrest the current turmoil,” he said in an e-mailed note. “Combined with the weak macro backdrop, concerns about political paralysis in Greece and the need to support the Spanish banking sector, risk aversion is rising.”

Spanish bond yields have risen almost 60 basis points since elections in Greece on May 6 failed to produce an outright winner. Greek voters return to the ballot box on June 17 as expectations increase that the nation may leave the currency, fanning contagion through the southern euro region.

Rajoy also signaled yesterday that the ECB should take measures to stabilize Spanish bond yields as he raised the possibility the country may lose access to financial markets. Rajoy has repeatedly threatened Spaniards with the risk of a bailout as he seeks to convince them to accept austerity. Budget Minister Cristobal Montoro adopted his rhetoric yesterday.

Budget cuts “are what decide whether we can finance ourselves or not,” he told lawmakers in Madrid. “What we are going to see in Spain are the welfare cuts of a country that can’t finance itself if we don’t do what we have to do.”

To contact the reporters on this story: Emma Ross-Thomas in Madrid at; Esteban Duarte in Madrid at

To contact the editors responsible for this story: Craig Stirling at; Paul Armstrong at

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