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Spain's borrowing costs to soar at triple bond sale

Source: Reuters - Thu 15th Sep 2011

Spain will pay a heavy premium to borrow up to 4 billion euros via three bond issues on Thursday, as fears of a Greek default rattle the markets.

Fellow euro zone struggler Italy had to pay the highest interest rates in the euro era to sell five-year bonds on Tuesday. Spain cannot expect to do much better.

The Treasury aims to raise a more modest 3-4 billion euros combined than the 6.5 billion sold in Italy, but nonetheless the issues will provide a test given investors' reluctance to take on debt from countries on the euro zone's periphery.

The Treasury does at least have the support of the European Central Bank, which has bought roughly 70 billion euros of periphery debt in the last five weeks in an attempt to stop the crisis spreading to Spain and Italy.

That is providing some cushion for debt auctions, even if wider measures may be needed to stop the crisis spreading.

"Markets should not expect stellar results. There is a feeling that this is not a steady situation in markets and one that can't go on much longer," said David Schnautz, analyst at Commerzbank.

He expected that the Treasury would sell in the middle of its target range but that demand would be weaker than auctions held before the ECB started buying bonds again in mid-August.

The Treasury will auction a bond with a 4.6 percent coupon maturing July 30, 2019, a bond with a 4 percent coupon maturing April 30, 2020, and a bond with a 4.85 percent coupon maturing Oct 31, 2020.

All are expected to have a yield around 5 percent at Thursday's auctions, in line with secondary market trading, which would be roughly the highest level since 2002.

Analysts say Spain will be able to keep financing at those levels, but if borrowing costs on 10-year debt were to rise as high as 7%, then the country would eventually run into trouble.

Spain's benchmark 10-year bond had a yield of around 5.3% in secondary market trading late on Wednesday.

Investors are hoping that European finance ministers meeting on Friday in Poland will allay market doubts over whether Greece will default and make progress on measures to shore up its finances.

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