Spain and Italy borrowing rates soar in latest auctions

RTE | APRIL 24, 2012

Borrowing costs for both Spain and Italy rose today in their latest auction of government bonds.

Spain’s borrowing rate nearly doubled in a short-term debt auction as investors fretted over the euro zone’s determination to deal with its debts.

And Italy raised nearly €3.5 billion in a short-term bond sale today but at sharply higher interest rates amid fresh concerns over the euro zone outlook, the Bank of Italy said.

The Spanish treasury said it raised €1.933 billion but the timing could hardly have been worse, with financial markets slumping on concern that Europeans are wavering in their commitment to austerity.

The sale of three-month and six-month bills came a day after Spain’s central bank declared the country had plunged back into recession in the first quarter of 2012.

Markets were shaken after a first round of French presidential elections on Sunday put Socialist Francois Hollande, who wants the euro zone to focus on growth rather than austerity, ahead of incumbent Nicolas Sarkozy. The two contenders face off in a final vote May 6.

Further undermining stability, the Netherlands’ government collapsed yesterday after failing to reach agreement over austerity measures, placing its AAA credit rating at risk. But Spain still managed to lure strong interest in the auction with overall demand outstripping supply by more than four-to-one.

The money raised was towards the top of its targeted range of €1-2 billion. But it had to pay a steep price. The borrowing rate leapt to 0.634% from 0.381% for three-month bills and to 1.58% from 0.836% for six month bills, when compared with the last similar auction on March 27.

Spain has promised to cut its public deficit – the annual shortfall of income compared to spending – to 5.3% of gross domestic product in 2012 and just 3% of GDP in 2013. Last year it had allowed the deficit to hit 8.5% of GDP – 2.5 percentage points over target.

Desperate to meet its targets, the government approved €27 billion in fiscal tightening in its 2012 budget, in addition to an earlier round of tax increases and spending cuts amounting to €15.2 billion.

But analysts say those targets will be harder to reach as tax income declines and welfare costs rise because Spain is back in recession just two years after emerging from the last downturn. Spanish GDP fell by an estimated 0.4% in the first quarter of 2012 after a 0.3% decline in the last three months of 2011, the Bank of Spain said yesterday.

Spain, whose unemployment rate at the end of 2011 was already the highest in the industrialised world at 22.85%, suffered a further 4% year-on-year drop in employment in the first quarter of 2012, the Bank of Spain said.

In addition to raising the cost of Spain’s debt financing, worries about Spain’s finances have sharply depressed the stock market. Madrid’s IBEX-35 index of leading shares has dropped by nearly 19% since the beginning of the year, slipping below 7,000 points for the first time in more than three years.

Italy borrowing costs rise sharply

Italy raised nearly €3.5 billion in a short-term bond sale today but at sharply higher interest rates amid fresh concerns over the euro zone outlook, the Bank of Italy said.

Rome issued bonds worth a total of €3.44 billion today. The offer included €2.5 billion in bonds due in 2014 which were sold to give buyers a yield, or rate of return of 3.35%, up from 2.35% at a similar sale in March.

The government also sold €501m of inflation-indexed bonds due to mature in 2017 at 3.88%, up from 2.04%, and €441.5m in bonds due in 2019 at 4.32%, up from 3.06%.

Italy’s borrowing costs had been falling in recent months after Prime Minister Mario Monti implemented a series of budget cuts and pension reforms as well as launching key reforms aimed at boosting growth.

Fresh concerns, however, over whether fellow eurozone struggler Spain can stabilise its public finances, coupled with nervousness over the French presidential elections and the political crisis in the Netherlands has turned sentiment for the worse again.