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Spain sees debt cost rising at next bond sale

Source: Reuters - Fri 10th Dec 2010

Spain's cost of borrowing will probably rise at bond sales next week, Economy Minister Elena Salgado acknowledged on Friday, adding that the government would take further steps if necessary to meet its budget targets. Madrid has rushed in a series of new proposals to strengthen its finances over the past 10 days, seeking to rebuild investor confidence. But the Spanish yield premium that investors demand over German bunds, Europe's debt benchmark, has remained stubbornly high and jumped again on Friday to 245 basis points.

Spain's financing costs have soared since October as investors fear other highly indebted and fragile economies in the euro zone will end up needing rescue packages similar to those of Greece and Ireland.

Salgado told national radio station Onda Cero that the increase to Spain's borrowing costs was a temporary phenomenon and that yields of more than 5 percent on Spanish government debt were not "alarming".

Madrid has two more auctions planned this year and will sell both 10- and 15-year bonds on Dec. 16. Its 10-year bonds currently trade at yields of around 5.37 percent on the secondary market, while 15-year yields are around 5.9 percent.

"We are paying an average interest rate of 3.6 percent and it is possible that ... we might have to pay 5 percent. But it would only be on those issues that we do at this moment," Salgado said in the interview with Onda Cero.

"It's true that we might have to pay a little more for bond issues than we have in the past. For that reason we have said we will reduce the volume until the markets stabilise."

Investment bank UBS said investor concerns about Spanish government debt and the banking sector had abated but not disappeared. Worries "may persist until larger provisioning buffers and stronger capital are rebuilt in the financial sector," UBS said in a research note.

Shares in the euro zone's largest bank Santander and BBVA were 2.4 and 1.7 percent lower, while Spain's smaller banks also lost ground during the morning.

Spain has responded to the latest phase in the euro zone crisis by bringing forward plans to partially privatise state assets including the national lottery - best known for the "El Gordo" Christmas draw - while increasing taxes and cutting benefits.

DEFICIT TARGET INTACT

Salgado said Spain would stick to its budget target come what may, saying this was "unconditional".

Spain and Portugal have moved into the eye of the storm since Ireland was forced into an 85 billion euro aid deal, with bond yields rising steadily for both.

A bailout for both Lisbon and Madrid would likely stretch the current funds the EU has put aside to deal with the crisis but Salgado insisted that an Irish-style rescue package for Spain had never been contemplated.

She added that the Socialist government has no plans or need to raise either gasoline taxes or value-added tax (VAT), which was increased to 18 percent from 16 percent in July.

"At the moment our fiscal structure is sufficient to finance the costs of our public administration. There is no tax increase planned" Salgado said.

However, the government would take further steps and revise the budget if required to hit the target, Salgado said.

Last week the government raised the tax on tobacco. Salgado ruled out co-payment on medicines by patients to raise revenues.

Another of the measures announced last week, the partial privatisation of airports authority AENA, could raise 8 billion euros, Salgado said.

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