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Spain OKs 25 bln euro tariff bond issue

Source: Reuters - Wed 24th Nov 2010

Spain approved the issue of up to 25 billion euros of government-backed power-tariff bonds on Tuesday amid surging yields on government debt that could make selling the bonds in the near term a costly affair.

A bookbuilding process starts on Wednesday to sound out demand for the bonds. Which are designed to compensate utilities for the losses they have incurred on power tariffs.

"Under normal circumstances it would be quality, state-backed paper and swappable at the European Central Bank's window, but we are at a very delicate moment," a power industry source said.

Spain's borrowing costs jumped on Tuesday as risk aversion spread from Ireland and the central bank warned the economic recovery would be halting, prompting investors to ignore Madrid's progress toward its deficit targets.

Spain's deficit between power supply tariffs and the generation and distribution costs shouldered by indebted power utilities like Endesa and Iberdrola over the last 10 years has hit 16.5 billion euros.

The deficit has been swelled in recent years by Spain's expensive roll-out of renewable energy, its improvements in the electricity grid, and the cost of supplying power on its islands.

The government has said it plans to eliminate the power tariff deficit by 2013 through a combination of higher tariffs and lower subsidies for renewables energy despite the shortfall widening progressively to reach and estimated 4 billion euros in 2010 alone.

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