Spain borrowing costs slide
Madrid - Arabstoday
Spain's borrowing costs slumped Thursday as bond markets banked on Madrid snatching a eurozone financial lifeline within weeks. The success of a 4.61-billion-euro ($6.0-billion) bond auction, held on the opening day of a European Union summit on the eurozone crisis, reflected a conviction that Spain will seek eurozone help, and soon. But despite the market relief, new data showed that recession-bound Spain, where one in four workers is jobless, still faces deep-seated financial and economic problems.
Bad loans at Spanish banks, struggling in the aftermath of a 2008 property market crash, soared to a record of more than one in 10 loans in August, a Bank of Spain report showed.
The ratio of non-performing loans soared to an unprecedented 10.51 percent of total loans from 9.42 percent the previous months, it said.
Prime Minister Mariano Rajoy's government has already obtained a eurozone rescue loan of up to 100 billion euros for the banks, although it says it will only need about 40 billion euros of that.
The big question now is when Spain will seek aid to finance the broader economy.
Frustration over deficit-cutting austerity measures during a biting recession is spilling into the streets of Spain, the fourth-largest economy in the eurozone.
In cities across the country, parents, teachers and students rallied Thursday to protest education cuts that have boosted class sizes and pushed up university tuition fees.
Spain will decide whether to seek a eurozone rescue "within weeks", an Economy Ministry official said this week, a timetable that dovetails with other sources in Brussels and elsewhere in Europe.
The bond market was helped, too, by Moody's Investors Service's decision Tuesday to leave Spain's credit rating untouched, one notch above junk-bond status, citing an expected eurozone rescue.
A downgrade to junk-bond status could have prompted a flight by cautious investors, forcing up Spanish borrowing costs and accelerating any request for help.
As it is, Spain's Treasury took advantage of the improved confidence to raise more than its target range of 3.5 billion to 4.5 billion euros in a sale of three-, four- and benchmark 10-year government bonds.
The interest rate on 10-year bonds, the litmus test for market feelings about Spain's long-term debt, fell to 5.458 percent from 5.666 percent at the last comparable sale on September 20.
For three-year bonds, the rate skidded to 3.227 percent from 3.676 percent at the previous comparable auction September 6 and for four-year bonds it dropped to 3.977 percent from 4.603 percent over the same period.
On the open market, Spanish 10-year bond yields slipped to 5.358 percent in the afternoon, the lowest since April.
The return demanded by investors before they buy Spanish bonds was 3.71 percentage points higher than safe-bet German debt. That premium was also a six-month low.
Spanish sovereign borrowing costs have eased in recent weeks, but only because the European Central Bank has said it is willing to buy an unlimited amount of Spanish government bonds to curb rates.
The ECB will only do so, however, after Spain has applied for a credit line from the eurozone bailout fund and submitted to strict economic conditions and international supervision.
"Hopes were growing that progress on a deal may be made at the EU leaders' summit in Brussels which begins today," said Jonathan Loynes, analyst at London-based research group Capital Economics.
Even if Spain only seeks a "precautionary" eurozone credit line without actually borrowing any cash, the ECB would still have to buy Spanish bonds to prevent Spanish borrowing costs from rising again, he said in a report.
Brokerage Link Securities was optimistic about a deal for external help. "Everything now points to Spain and its partners being on the brink of reaching an agreement," it said.