Bloomberg News

Spanish Funding Costs Drop 50% as Investors Ignore S&P Cut

January 17, 2012

(Updates with Fitch comments on Greece in eighth paragraph. For more on the sovereign-debt crisis, see EXT4 <GO>.)

Jan. 17 (Bloomberg) -- Spanish borrowing costs plunged at an auction as investors ignored downgrades by Standard & Poor’s to snap up bonds across Europe amid evidence that the economic outlook may be improving.

Spain paid an average 2.049 percent to sell 12-month debt today compared with 4.05 percent on Dec. 13. It sold 18-month paper at 2.399 percent, down from 4.226 percent last month. The euro region’s bailout fund also sold bonds, with investors bidding for 3.1 times the amount available.

Europe’s debt crisis has stabilized for now even after S&P cut the ratings on nine euro-region members Jan. 13, stripping France of its AAA grade and lowering Spain by two levels to A. Bond yields have since slipped in a situation reminiscent of the rally in U.S. Treasuries after S&P downgraded the world’s largest economy in August.

“These are cracking auctions for the Spanish Treasury,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, said by e-mail. “The muted reaction to Friday’s well- flagged S&P downgrades is supporting sentiment.”

The yield on France’s 10-year government bond has declined 7 basis points to 3.029 percent since Jan. 13 and the yield on Spain’s equivalent security has slipped 12 basis points to 5.069 percent. Bank of England Governor Mervyn King said today that the effect of the French downgrade has been muted.

ECB Financing

Conditions for bond investors may have been helped by the European Central Bank’s decision to pump longer-term emergency liquidity into the financial system. Under the terms of that operation, banks can borrow three-year cash from the ECB at 1 percent and use it to buy bonds at debt auctions, a trade that Spiro said helped today’s auction.

Signs that the euro-area economy has stopped deteriorating may also be helping to drive bond sales. German investor confidence jumped the most on record in January, the ZEW Center for European Economic Research said today, while French and German business confidence rose last month.

Even so, the euro-region crisis might still worsen again. Greece is insolvent and will probably default, Fitch Ratings Managing Director Edward Parker said today in an interview in Stockholm. A cut of private-sector debt being negotiated by Greece, European officials and the International Monetary Fund “clearly is a default in our book,” Parker said.

Debt-Swap Talks

Greek Prime Minister Lucas Papademos is due to resume talks tomorrow with a group representing private Greek bondholders after a five-day break to discuss forgiving at least half of the nation’s debt in a bond swap to avoid the euro area’s first sovereign default.

Negotiations broke off on Jan. 13 with the Institute of International Finance, which represents Greece’s private creditors, blaming the breakdown on disagreement over the coupon, or interest rate, to be paid on new bonds and on discord among different authorities involved in the talks.

European leaders including German Chancellor Angela Merkel and French President Nicolas Sarkozy have sought to insulate the rest of the euro area from Greece, the region’s most-indebted country, saying the effort to write off part of its debt is a unique case, while pledging to keep Greece in the currency area.

Demand for Spain’s 12-month bills today was 3.54 times the amount sold, the Bank of Spain said, compared with 3.14 times the last time the securities were offered on Dec. 13. The bid- to-cover ratio for the 18-month notes was 3.23, compared with 4.97 in December. The amount sold was just below the 5 billion euros ($6.4 billion) set as the maximum target for the auction.

Sentiment ‘Firming’

“These results stand to further underpin the current firming of peripheral sentiment,” Richard McGuire, a senior fixed-income strategist at Rabobank International in London, wrote in an e-mailed note.

The Spanish Treasury, which aims to sell as much as 4.5 billion euros of bonds maturing in 2016, 2019 and 2022 on Jan. 19, has been exceeding the maximum targets it sets for the auctions since Dec. 13, benefiting from the decline in borrowing costs.

“Spain will end January having secured 25 percent of its annual target,” Riccardo Barbieri, London-based chief European economist at Mizuho International Plc, wrote in a note after the downgrade last week. “Negative ratings news should not overshadow good progress on funding.”

The euro region’s bailout fund also successfully sold bonds even after S&P downgraded it one level late yesterday. The European Financial Stability Facility sold 1.501 billion euros of 182-day bills at an average yield of 0.2664 percent, the Bundesbank said.

Wolfgang Franz, who heads ZEW and Merkel’s council of economic advisers, expressed confidence that governments will master the debt crisis.

The euro “will survive” and still have its current 17 member countries a year from now, Franz said in an interview with Bloomberg Television’s Maryam Nemazee today. Policy makers “will do their best to solve the euro crisis with respect to Italy, but also with respect to Greece.”

--With assistance from Tony Czuczka in Berlin. Editors: Emma Ross-Thomas, Alan Crawford

To contact the reporter on this story: Angeline Benoit in Madrid at

To contact the editor responsible for this story: Craig Stirling at

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