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Spain Sells More Bills Than Scheduled as Yields Increase

April 17, 2012

Bank of Spain Governor Miguel Angel Fernandez Ordonez. Photographer: Angel Navarrete/Bloomberg

Bank of Spain Governor Miguel Angel Fernandez Ordonez. Photographer: Angel Navarrete/Bloomberg

Spain’s central bank chief said the country risks missing deficit estimates unveiled last month just hours after a successful bill sale dissipated some concerns that the government may have to seek a bailout.

“The projected course of total revenues in the budget is subject to downside risks,” Bank of Spain Governor Miguel Angel Fernandez Ordonez told a parliamentary committee today in Madrid.

The comments may undermine the optimism sparked by Spain’s successful bill auction just two hours previously. While 10-year bonds rose today, the yield is still close to 6 percent amid concern that Prime Minister Mariano Rajoy’s government will struggle to rein in the budget deficit and shore up a banking industry facing additional charges of 50 billion euros ($66 billion.)

Ordonez said revenue estimates should be “prudent” as he confirmed the economy is now suffering its second recession since 2009. The economy will shrink 1.8 percent this year, the International Monetary Fund forecast today.

The government’s plan to raise 2.5 billion euros from a tax amnesty is “particularly uncertain,” Ordonez told lawmakers in a session to discuss the budget, which was approved by the Cabinet on March 30 and is making its way through parliament.

Jobless Benefits

Spending linked to unemployment benefits may also be more than forecast as the nation suffers the highest jobless rate in the European Union, at almost 24 percent. If additional measures are needed, indirect taxes should be increased and temporary tax measures may have to be replaced by permanent ones, said Ordonez, who was appointed by the former Socialist government for a six-year term that ends this year.

Ordonez also said the decision by the government, which came to power on Dec. 21, not to present the 2012 budget until March 30 undermined confidence, as did slippage last year and uncertainty over what the deficit goal for this year would be.

Borrowing costs have surged about 1 percentage point since Rajoy said on March 2 the government would aim for a budget shortfall of 5.8 percent of gross domestic product instead of the 4.4 percent agreed with the European Union. A new goal of 5.3 percent was set by euro-region finance ministers on March 12.

‘Enormous Worry’

“The doubts on the deficit goal created enormous worry as well as the presentation of the budget three months afterward, which was probably very justified, but the markets didn’t see it as justified,” he said.

The IMF created news doubts about Spain’s current targets today when it forecast a Spanish shortfall of 6 percent this year and 5.7 percent in 2013, almost twice the 3 percent pledged by the Rajoy government for next year.

Spanish bond yields, which rose as high as 6.156 percent yesterday, the most since Dec. 1, fell to 5.89 percent after the Treasury sold more bills than the 3 billion euros it targeted for the auction.

Spain sold 12-month bills at 2.623 percent, up from 1.418 percent at the last auction on March 20, the Treasury said. The Treasury also sold 18-month bills at 3.11 percent, compared with 1.711 percent last month.

Spain faces another test of market sentiment on April 19 when it seeks to sell 2.5 billion euros of two-year bonds and its 10-year benchmark security.

Auction Results

“As far as this auction goes, not so bad but not good enough, in my opinion, to provide the market with a sense of optimism going into the bond auction on Thursday,” said Luca Jellinek, head of European interest-rate strategy at Credit Agricole Corporate & Investment Bank in London.

Demand for the 12-month bills was 2.9 times the amount sold, compared with 2.14 times last month. Demand for the longer maturity notes rose to 3.77 times from 2.93.

Demand for Spanish debt has been underpinned by the European Central Bank’s emergency three-year lending to banks at tenders in December and February. Spanish banks’ average net borrowings from the ECB surged almost 50 percent in March to 227.6 billion euros, central bank data showed last week, and data from the Treasury show Spanish lenders piled up on the nation’s debt in the three months through February.

ECB Support

Spanish officials have called for additional help from the central bank, with Industry Minister Jose Manuel Soria saying today that a more “expansionary” policy to inject more liquidity would be “desirable.” Jaime Garcia-Legaz, the deputy minister for trade, called on April 13 for the ECB to restart bond purchases.

Economy Minister Luis de Guindos met ECB President Mario Draghi in Frankfurt today in a meeting that was also attended by Jose Manuel Gonzalez-Paramo and other members of the executive board, the Spanish ministry said. It gave no details of what was discussed in an e-mailed statement today.

Rajoy has repeatedly said that the country won’t need a bailout and on April 13 said it was “not possible” for the EU to rescue Spain. Soria raised the threat of a bailout again today to justify the need for budget cuts.

“If we don’t meet the deficit targets they will stop lending to us, and if no one lends to us, they will have to rescue us, and because the government rules out the possibility of a rescue and intervention, that’s why we’re doing reforms,” he said in an interview with RNE radio.

To contact the reporter on this story: Angeline Benoit in Madrid at Emma Ross-Thomas in Madrid at

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

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