A trader looks at his screens during a bond auction on a trading floor in Madrid on Thursday.ANDREA COMAS/Reuters
Spain managed to sell sovereign bonds Thursday in spite of Madrid's warning earlier this week that the country was losing access to the debt markets.
But the €2-billion sale came at a big price.
Spain sold 10-year bonds at a yield of 6.04 per cent, up substantially from the 5.73 per cent in a similar sale in mid-April. It also sold bonds maturing in October, 2014, at a yield of 4.33 per cent and other bonds maturing in October, 2016, at 5.35 per cent. Demand for all the bonds was strong.
The sale came only two days after Spanish budget minister Christobal Montoro said the "door of the markets isn't open to Spain." In retrospect, his statement looks to be an exaggeration, though, to be fair to him, a lot has happened since then.
While bond investors demanded a higher price for the Spanish paper, they were apparently also somewhat soothed by the government's efforts to fix its banking crisis before it spirals out of control. The government is asking European institutions to lend it money to bolster its banks' capital. One big bank in particular, Bankia, requires €19-billion.
No formal request for the bank bailout has been made yet. Madrid will wait until the International Monetary Fund and two independent consultancies complete their review of the Spanish banks. Estimates for the banks' capital needs vary considerably, from as low as €40-billion to more than €100-billion. Madrid is resisting a full-fledged sovereign bailout, like the ones that spared Greece, Ireland and Portugal from financial destruction, for fear that it would come with too many sovereignty-robbing conditions and prove politically unpopular.
Thursday's bond sale shows that Spain is no Greece; it can still fund itself, though at yields that are not sustainable over the long term. Greece, Ireland and Portugal accepted bailouts shortly after their funding costs rose to 7 per cent. Spain is just 1 percentage point below that level.
While yields in Spain rose, those in France went in the opposite direction Thursday after the country sold a range of bonds. The yields on the benchmark 10-year bonds dropped to 2.46 per cent from 2.96 per cent in the previous auction, giving a nice little political boost to new Socialist president Francois Hollande, who met with Prime Minister Stephen Harper over breakfast Thursday morning in Paris.
Mr. Harper urged Mr. Hollande to help complete the European integration project, which he described as only "half done." He was preaching to the converted, of course. Mr. Hollande is a strong advocate of greater fiscal integration, including the launch of euro bonds, which would pool the debt of the 17 euro zone countries. Germany is resisting euro bonds, as well as a joint bank deposit insurance scheme.
In Europe, the success of the Spanish bond sale help lifted the stock markets, if not the euro itself, which remained flat.
Economists say that Spain is still the big market risk. They say the sooner Spain fixes its banks, the better. Their fear is that any further deterioration in the Spanish banks will damage confidence in the Italian banks, which are among the biggest in Europe.
Eric Reguly