Spain to Sell $329 Billion of Debt as Borrowing Nears 100%

Spain will sell 243.9 billion euros ($329.2 billion) of bonds and bills next year to cover refinancing needs and its budget deficit, increasing its debt burden to 99.8 percent of gross domestic product.

The debt-to-GDP ratio will rise from 94.2 percent at the end of this year, according to the budget bill posted on the Budget Ministry’s website today. Budget Minister Cristobal Montoro presented the plan as Spain’s 10-year bond yields rose as high as 4.53 percent, surpassing the forecast of 4.3 percent on which the government is basing next year’s budget.

The central government’s spending plan, which sets aside 29.7 billion euros for jobless benefits and 36.6 billion euros for interest payments, aims to cut the deficit without raising taxes. Prime Minister Mariano Rajoy is betting the end of a five-year slump will help mend Spain’s finances, just as a political crisis in Italy highlights the fragility of southern Europe’s recovery.

The gap between Spanish and German 10-year yields widened to as much as 276 basis points, the most since Aug. 13., as the Italy’s former Prime Minister Silvio Berlusconi tried to bring down the country’s five-month old government.

’Comforting’ Yields

“The risk premium this morning isn’t where we’d like it to be, but it’s still reasonable in any case,” Rajoy told reporters in Astana in comments broadcast on TVE. Borrowing costs had fallen recently to a “comforting” level, he said.

Spain’s 10-year bonds trimmed their losses during the session to trade at 4.33 percent at 3:00 p.m. Italy’s 10-year yield reached 4.65 percent and before falling to 4.46 percent.

The budget draft shows pension payments rising 0.25 percent, while an increasing number of retirees will push the government’s bill up 4.9 percent to 127 billion euros, as the first leg of a social-security overhaul takes effect.

The government is trying to shrink the budget gap by broadening its revenue base and will conduct a review of the tax system next year. Montoro said there will be no tax increases next year, and said he doesn’t have a “plan B,” even as he said 2013 revenues will fall 2.3 billion euros short of his initial forecast.

Infrastructure spending will fall 8.6 percent next year, with investment in public works declining 17 percent, the budget showed.

Slumping Polls

Rajoy, facing a slump in his popularity, is seeking to avoid further tax increases and spending cuts as he approaches the mid-point of his four-year term. Austerity measures have toppled governments from Greece to Ireland, and Portuguese Prime Minister Pedro Passos Coelho suffered what he called a “national electoral defeat” yesterday as voters used municipal elections to protest against his policies.

Spain is targeting a deficit of 5.8 percent of GDP next year, compared with a goal of 6.5 percent this year. The European Union, the European Central Bank and the International Monetary Fund, the institutions monitoring the country’s bank bailout program, have all expressed concern that Spain will miss its budget target for a fifth consecutive year in 2013.

Montoro said this year’s objective is “achievable,” as he presented data showing that the public deficit, including all levels of government while excluding the cost of bank bailouts, was 3.58 percent of GDP in the first half. Local administrations will post a surplus this year, said Marta Fernandez Curras, one of Montoro’s deputies.

The 2014 budget is based on a growth forecast of 0.7 percent for next year. By comparison, the IMF forecast in July the Spanish economy will stagnate next year while the EU in May projected a 0.9 percent expansion.

Before it's here, it's on the Bloomberg Terminal.