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Spain Sells Bonds in Market Test Amid Protests

July 19, 2012

Spain Confronts Bond Market Access Threat as Union Protests Loom

Spanish miners wave banners and shout slogans near the Kio towers, headquarters of Bankia SA, after marching from Asturias to the capital to protest against government budget cuts in Madrid. Photographer: Angel Navarrete/Bloomberg

Spain plans to sell as much as 3 billion euros ($3.7 billion) of debt today as rising borrowing costs threaten its access to capital markets and Prime Minister Mariano Rajoy faces a round of street protests.

Spain will auction bonds maturing in 2014, 2017 and 2019 as the Treasury continues to focus on shorter-dated debt to avoid paying the 6.99 percent yields investors demand to lend for a decade. Still, five-year benchmark yields rose to 6.41 percent today, narrowing the gap with 10-year yields to 58 basis points from as wide as 154 basis points in January.

Spain needs to persuade investors to finance the euro region’s third-largest budget deficit after the nation sought a 100 billion-euro European bailout for its banks last month. Lawmakers in Madrid’s Parliament, which was surrounded by protective barriers, vote today on spending cuts that Rajoy defended yesterday as necessary for his government to be seen as a credible borrower.

“It’s clearly not sustainable in the long term for Spain to be trying to service their debt levels at the current rate of interest in the short end,” said Craig Veysey, head of fixed income at Principal Investment Management in London, part of Sanlam Group, which manages $72 billion. “Of course that’s the only place where they can issue debt at the moment.”

Protest Marches

Rajoy, in power since December, announced 65 billion euros of spending cuts and tax increases on July 11 after the second recession since 2009 and a 25 percent jobless rate made his previous three rounds of austerity insufficient. Lawmakers of the ruling People’s Party, who have a majority in Parliament, will ratify a decree on the measures in a session that started at 9 a.m. in Madrid. Rajoy didn’t attend the debate, leaving Budget Minister Cristobal Montoro to defend the cuts.

“We are acting out of necessity, necessity determines the road to follow,” Montoro said. “That’s why some of our ideas have been left by the wayside.”

Spain’s two biggest unions have called demonstrations across the country to protest the cuts to public workers’ pay and jobless benefits and an increase in sales tax. Parliament was protected by metal barriers today as police stood guard.

“There needs to be action from politicians because these sort of yield levels certainly won’t help Spain to reduce its budget deficit,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “It’s certainly not a sustainable path.”

French Auction

France, which sold bills at negative yields on July 16, also auctions debt today at 11 a.m. and 12 p.m. in Paris. It aims to sell notes maturing in 2015, 2016 and 2017 and inflation-linked bonds maturing in 2019, 2022 and 2040. Germany sold two-year securities at a negative yield for the first time yesterday as investors were prepared to see their funds eroded in exchange for security.

Spain will sell bonds maturing Oct. 31, 2014, July 30, 2017 and Oct. 31, 2019. None of the securities acts as a benchmark and each bond already has an outstanding volume of at least 16 billion euros, according to data compiled by Bloomberg. The two- year security traded to yield 5.25 percent yesterday.

By focusing on shorter-dated bonds, the Treasury has reduced the average maturity of outstanding debt to 6.36 years in May, compared with 6.84 years in 2007, when Spain was running a budget surplus funded by tax revenue from a real-estate boom.

Increasing Volatility

“It increases the volatility in the market as you have to roll over at a higher frequency,” said Tobias Blattner, a European economist at Daiwa Capital Markets. “It merely serves to highlight the increasing lack of confidence in the Spanish government, in particular when it comes to vital long-term investors.”

Spanish banks, increasingly dependent on the European Central Bank for funding, hold 28 percent of Spain’s outstanding debt, compared with 17 percent at the end of last year. Non- residents have cut their holdings to 37 percent from 50 percent in that period, Treasury data show.

Spain has already sold 65 percent of the 86 billion euros of bonds it planned to sell this year to finance the budget deficit, the Economy Ministry said on July 17.

The central government added to its issuance needs last week by agreeing to help regional administrations that are locked out of debt markets. The Treasury will fund most of the 18 billion-euro facility to help them finance deficits and meet debt redemptions, while the state-owned lottery will provide 6 billion euros.

The government hasn’t revised its issuance forecast since that plan was announced on July 13. Another factor which might affect its debt-sale plans is an extension the European Union gave Spain on its budget-deficit targets, softening the goal for this year to 6.3 percent of gross domestic product from 5.3 percent targeted in the budget.

To contact the reporters on this story: Emma Ross-Thomas in Madrid at; Lukanyo Mnyanda in Edinburgh at

To contact the editors responsible for this story: Craig Stirling at; Daniel Tilles at

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