Bloomberg News

Spain, France Pay Less to Borrow After Rajoy Eases Budget Goal

March 15, 2012

Spain and France sold 13.04 billion euros ($17 billion) of debt, with borrowing costs falling as the the European Central Bank’s increased lending spurred demand and eclipsed a second year of deficit slippage in Spain.

Yields fell and demand rose at the first Spanish auction since Prime Minister Mariano Rajoy loosened the nation’s budget- deficit goal for 2012. France issued 8.46 billion euros of notes, at the top end of the range targeted by the treasury, and 1.58 billion euros of inflation-linked bonds.

“There is no indication here that Spain’s recent fiscal slippage has served to put a dent in investor sentiment which, in itself, continues to be buoyed by the ECB’s aggressive liquidity provisioning,” said Richard McGuire, a senior fixed- income strategist at Rabobank International in London.

The ECB’s second Long Term Refinancing Operation, under which its three-year lending reached 1.02 trillion euros in late February, has eased the region’s debt crisis and alleviated concern about slowing growth by giving banks the means to invest in the region’s sovereign debt.

In the second such operation last month, 800 banks received a total of 529.5 billion euros, more than the 470 billion euros median forecast in a Bloomberg News survey and the 489 billion euros of the first tender in December.

Spain’s 10-year benchmark bond yield rose to 5.163 basis points after the auction as of 12:28 a.m. from 5.134 before the sale. The spread over German bunds of the same maturity widened 5 basis points to 321 points. France’s 10-year yield rose 6.6 basis points to 2.98 percent.

Auction Details

Spain sold 3 billion euros of bonds, below the Treasury’s maximum target of 3.5 billion euros. Notes maturing in April 2016 yielded an average 3.374 percent, down from 3.748 percent when the securities were auctioned on Jan. 12, while bonds maturing in January 2015 and July 2018 were sold to yield 2.44 percent and 4.193 percent respectively, the Madrid-based Bank of Spain said today.

Demand for the notes maturing in April 2016 was 4.13 times the amount sold, compared with 2.21 in January. The bid-to-cover ratio for the 2015 bonds was 4.96 times and 2.91 for the 2018 bonds, which hadn’t been auctioned since 2008.

‘Today was a test for demand, to check if it is still solid despite worries about the country’s fiscal consolidation,” said Annalisa Piazza, a fixed-income analyst at Newedge Group in London. “Spain already funded about 40 percent of its requirement and might hold for benchmark auctions, which are cheaper, to sell more.”

Spanish Budget

In the auction today, France sold 2.106 billion euros of April 2014 notes at an average yield of 0.7 percent, lower than the 1.14 percent on Sept. 15. It sold 1.93 billion euros of October 2014 securities at a yield of 0.86 percent, below the 2.01 percent it paid on Jan. 20, and 1.165 billion euros in February 2016 notes at an average yield of 1.4 percent compared with 2.17 percent on Nov. 17.

Euro-area finance chiefs agreed this week Spain’s budget deficit goal for 2012 was unachievable as the euro area’s fourth-biggest economy is set to enter its second recession since 2009.

Spain’s budget deficit was 8.5 percent of gross domestic product last year, compared with a 6 percent target. For 2012, European finance ministers agreed to ease the goal to 5.3 percent from an initial 4.4 percent.

Rajoy yesterday reiterated his support for the ECB’s three- year loans to banks, saying they provided “great relief” to the euro region. Banks based in Spain borrowed 152.4 billion euros in February from the ECB, data showed today, the most on record and almost half the amount taken by euro-region lenders overall.

To contact the reporters on this story: Angeline Benoit in Madrid at abenoit4@bloomberg.net; Vidya Root in Paris at vroot@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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