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Spain pays higher rates to borrow from markets

Source: AFP - Thu 16th Dec 2010

Spain paid out sharply higher interest rates to whip up demand for a 2.4-billion-euro bond sale on Thursday, highlighting market fears of a debt refinancing crunch in 2011.

The Spanish government depends heavily on borrowing through bond sales, but it is paying punitive rates as markets speculate it may fall into a European debt quagmire that has trapped Greece and Ireland.

Moody's Investors Service's warned on the eve of the sale that it had placed Spain's sovereign rating on review for a possible downgrade, citing concerns over debt refinancing, banks, and high-spending regions.

The Socialist government must raise an estimated 170 billion euros from the debt markets next year, Moody's cautioned. If investors fear a debt crisis, they will demand higher and higher rates of interest.

In the latest sale, Spain raised 2.4 billion euros with a mix of bonds expiring in 10 years and 15 years.

The Treasury sold 1.782 billion euros of benchmark 10-year bonds, paying investors an average yield of 5.446 percent, up from 4.615 percent at the last 10-year bond sale November 18, the finance minstry said.

It sold another 619 million euros of 15-year bonds at 5.953 percent, compared with 4.541 percent in October when similar dated bonds were last issued.

The yields were roughly in line with the market rates prevailing after the Moody's warning Wednesday of 5.452 percent for 10-year bonds and 5.984 for 15-year bonds.

However, the eurozone sovereign debt market is strongly distorted because since May the European Central Bank has stood by under exceptional measures as a buyer of last resort of debt in governments threatened by rising bond rates or yields.

In the last three weeks the ECB has stepped up massively its purchases of bonds issued by weaker eurozone members to prevent the yields from rising to unbearable levels.

Moody's, which trimmed Spain's sovereign debt rating from top-notch Aaa to Aa1 in September, warned on Wednesday of a possible further cut but stressed that the country's solvency was not under threat.

The New York-based agency said it did not expect the country would need support from a European rescue fund.

A financial rescue for Spain would be far bigger than anything seen to date in Europe: the size of its economy is twice that of Greece, Ireland and Portugal combined.

Spain's finance minister vowed to try to change Moody's mind.

"I hope that within three months we can give sufficient arguments so that this negative outlook changes to positive," Finance Minister Elena Salgado told reporters after the agency issued its warning.

Moody's blamed three factors for the review: Spain's vulnerability because of high funding needs next year; the risk that banks may need more money than expected to recapitalise; and concerns over Madrid's ability to control spending by semi-autonomous regions.

The agency estimated Spain may have to raise 170 billion euros from the markets next year, despite government hopes to raise up to 15 billion euros by partly privatising the national lottery and airport operator.

In addition, Spanish regions needed another 30 billion euros in refinancing in 2011, it said.

And banks had another 90 billion euros of debt to refinance that year.

The Spanish government aims to rein in its public deficit from 11.1 percent of annual economic output last year, the third highest in the eurozone after Greece and Ireland, to 3.0 percent - the EU limit - by 2013.

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