Spain short-term debt costs to stay high after bank plan

 

Spain will pay high premiums to sell short-term debt on Monday, after the government's latest attempt to fix the banking sector failed to allay concerns about the burden of the clean-up on the country's finances.

Addressing a problem which lies at the core of the euro zone debt crisis, Spain's government on Friday announced its second financial sector reform in three months to calm market fears that the financial system faced a deep capital hole.

But with the country already deeply in debt and still facing recession and massive unemployment, investors remained skeptical that a long-term solution had been found.

"Spain has come under pressure because of the banks and the uncertainty that hangs over them. On top of this, the market is very thin and the traditional (debt) buyers are not around," said Peter Chatwell, strategist at Credit Agricole in London.

Spain's 10-year benchmark yield hit a six-month high on Thursday after the government announced it would partially nationalize one of the country's largest retail banks Bankia after days of anxiety over the lender.

The 12-month T-bill was trading in the secondary market - a guide of how much the Treasury will pay at Monday's auction - at 2.45% on Friday afternoon after selling at an average yield of 2.623% a month ago.

The 18-month bill was trading on Friday at 3.1% on the secondary market after costing around the same at auction in April.

Spain rarely paid more than 1% for one-year debt before the euro zone debt crisis began in May 2010, while euro zone safe-haven Germany sold one-year bills last month at just 0.074%.

The government hopes to raise between 2 billion and 3 billion euros when it auctions the bills at around 0840 GMT on Monday.

The bigger test for Spain will on Thursday when it sells 3- and 4-year bonds, where it may need to rely on domestic buyers to get the bonds away, with foreign investors put off by concern about the country's longer term stability.

Spain has already sold over half of its total gross debt target this year, taking advantage of a slew of cheap liquidity from 2 ECB 3-year loan offerings in December and February worth over a trillion euros.