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Spain borrowing costs dive, ECB loans seen at work

Source: Reuters - Wed 21st Dec 2011
Spain borrowing costs dive, ECB loans seen at work

Short-term financing costs for euro zone struggler Spain more than halved on Tuesday as banks lapped up debt at an auction, with much of the purchasing power said to come from cut-rate money to be lent by the European Central Bank.

The euro zone's debt dilemma remained on view in Greece, however, where borrowing costs rose to 4.68% for just 3 months. The Greek debt agency sold 1.3 billion euros of the short-term debt.

Demand for the 3 & 6 month Spanish Treasury bills was high, with more than 18 billion euros offered for 5.6 billion euros sold, above the targeted amount of 3.5 billion to 4.5 billion euros.

"This is another impressive auction from Spain and an early Christmas present for the Treasury," said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London "Spain is by no means out of the woods. The Spanish economy is still flat on its back and Spain is threatened with yet more credit rating downgrades."

Economists believe Spain is already in its second recession in three years and the sluggish economy and high deficit have put it at centre of the euro zone debt crisis. The main concern is that if it needs a bailout it would stretch available funds and political will.

Rating agency Fitch said last week a comprehensive solution to the euro zone debt crisis is beyond the region's reach and warned six of its economies, including Italy and Spain, could be hit with credit downgrades in the near future.

Fiscal prudency by Spain's outgoing Socialists and the promise of further cuts by the incoming centre-right government has helped ease jitters and draw a line between it and the euro zone's third largest economy Italy.

Spain also has some room to maneuver, with no major debt redemptions until April while Italy faces coupon payments of around 100 billion euros in the first four months of 2012.


Demand for ECB's one-week funds was subdued on Tuesday as banks positioned themselves for its three-year loan operation.

Spanish bond yields have tumbled from euro-era highs since the ECB announcement with some traders using prospects of a large take-up at the 3-year tender to square short positions before the end of the year.

"What has happened is that some banks hadn't realized quite how strong the ECB measures were. But there have been European (and Spanish banks) that were able to read the ECB's message and have operated through carry trade," said a treasurer at a Spanish bank.

A carry trade is market jargon for borrowing at a lower rate to get returns elsewhere at a higher one.

The ECB tenders are probably only been part of the story, say economists.

On Monday, Spain's Prime Minister elect Mariano Rajoy pledged deep spending cuts in his first address to the new Parliament after his People's Party (PP) trounced the Socialists in the November election, though gave few details.

"There is a certain logic to the (theory the acquisitions are funded by the ECB tenders). Whether that explains everything is up for debate. Both bills have seen yields that are miles lower, and other factors include Rajoy's proposals yesterday and strong levels of end-of-year demand for high yields," Strategist at Monument Securities, Marc Ostwald said.

"There are lot of people out there looking to park very short dated money over year end and this is as good as any where."

On Tuesday, the Spanish Treasury sold 3.7 billion euros of 3-month paper for 1.735%, after an average yield of 5.11% in November, at a bid-to-cover ratio of 2.9, up from 2.8.

The 6-month bill sold for an average yield of 2.435%, down from 5.227%, with 1.92 billion euros sold and demand outstripping supply by a factor of 4.1, after 4.9 a month earlier.

While average yields were down from a month earlier, and around 30 basis points lower than levels seen in the secondary markets before the auction, the Treasury was still paying more than 150 basis points above pre-crisis levels on both bills.

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