Spanish short-term debt costs soar


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The Independent Online

Short-term Spanish debt interest rates have soared, highlighting how wary investors are of the country's financial woes.

The Treasury raised 3.39 billion euros in 12- and 18-month bills, more than its upper target of 3 billion euros, but the cost skyrocketed.

The interest rate on the 12-month bills shot up to 5.07% from 2.98% at the last such auction on May 14. The rate on the 18-month bills soared to 5.10% from 3.3%.

In the secondary market, where issued debt is openly traded, the yield on 10-year Spanish bonds remained perilously high at 7.13%.

Meanwhile German investor confidence plummeted in June over increasing concerns about the economies of Spain, Greece and other countries in the eurozone.

The ZEW institute's monthly confidence index dropped by 27.7 points to a level of minus 16.9 points - its strongest decline since October 1998.

ZEW president Wolfgang Franz said financial market experts are clearly warning against an over-optimistic assessment of Germany's economic perspectives this year.

He said: "The risks of a pronounced decline in economic activity in countries with close trade ties to Germany are very clear."

Worries about Spain's ability to repay its debt grew last week, when the country accepted a European loan of up to 100 billion euros to shore up its ailing banks, which are sitting on massive amounts of failed property investments.

The big fear is that, as the money will count as a loan and raise Spain's overall debt load, the country's financing costs will suffocate the government as it tries to wade through a money-sucking recession and a 24.4% jobless rate.

Spain can survive the current high interest rates for weeks, analysts say, but not in the longer term. If it becomes clear that the borrowing rates will not come back down, Spain will likely have to ask for a European bailout - which would come at lower interest rates than those offered by bond markets. The problem here is that Spain's economy is the eurozone's fourth-biggest and larger than those of bailed-out Greece, Ireland and Portugal combined.

The Spanish economy minister, attending the Group of 20 world leaders' summit in Mexico, said the country is being punished unfairly in debt markets.

Spain is waiting for two independent audits of its banks, due to be presented to the government on Thursday, to determine how much of the eurozone rescue loans it will tap. Investor sentiment toward Spain will in coming days depend upon the sum of loans demanded as well as any support measures announced by European leaders.