Spain’s borrowing costs fell, at the first sale of debt since the government announced a new austerity package, but not enough to suggest markets believe the country’s finances are on a sustainable path with banking problems yet to be resolved.
Prime Minister Mariano Rajoy unveiled spending cuts and tax hikes worth 65 billion euros over the next 2-1/2 years last week, in a bid to demonstrate that Madrid can curb its debts.
New Bank of Spain Governor Luis Maria Linde also took aim at the country’s banks, urging them to implement recapitalisation plans quickly, whilst acknowledging for the first time that lenders which are not viable will have to be wound down.
Spain’s troubled banking sector lies at the heart of concerns over the health of the euro zone’s fourth largest economy, and a quick resolution to the sector’s ills could help lower the amount investors demand to buy its debt.
Despite much work to be done, borrowing costs at Tuesday’s short-term debt sale were sharply lower than a month ago, coming before a key test of appetite for the country’s longer term issues on Thursday.
The yield on the 12-month bill was 3.918 percent, down from 5.074 percent last month, which was its highest in 15 years.
The yield on the 18-month bill was 4.242 percent compared with 5.107 percent at auction in June, right after Spain sought a bailout for its ailing banks worth up to 100 billion euros.
«Yields have come down by nearly a percentage point, so that’s not to be sniffed at, and there’s room for them to fall further, but we need details of the bank bailout,» said Orlando Green, strategist at Credit Agricole.
Euro zone finance ministers are due to discuss the terms of Spain’s bank rescue on Friday at 1000 GMT, a spokeswoman for the chairman of the euro zone ministers, Jean-Claude Juncker, said.
Spain’s economy minister said Europe’s debt markets were not functioning properly and investors outside the euro zone had no confidence in the euro project.
«There are no (debt) operations between nations in the monetary union and practically the only demand for Italian debt comes from Italians,» Luis de Guindos was quoted as saying in Spanish newspaper La Vanguardia.
«A similar thing is happening in France and Spain.»
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