Eurozone bond auctions ease debt crisis tensions (Roundup)

Jan 13, 2011, 13:44 GMT

Frankfurt/Madrid/Rome - Heavily indebted Spain and Italy successfully sold new bonds on Thursday in what was seen as a major test of Europe's chances of containing the debt crisis gripping parts of the region.

But the cost of arranging the new capital for both states was high, underscoring ongoing investor doubts about the nations' chances of funding their large piles of debt.

Spain will have to pay a yield of 4.59 per cent on the five-year bonds. That compares with an average yield, or interest rate to be paid on the debt, of 3.6 per cent when similar bonds were auctioned on November 4.

Madrid's first bond action of the new year totalled nearly 3 billion euros (3.9 billion dollars).

At the same time, Italy's auction of a five-year security, which also totalled 3 billion euros, attracted an interest rate of 3.67 per cent, compared with 3.24 per cent in November.

Italy and Spain are the 17-member eurozone's third and fourth biggest economies respectively. Their auctions followed Portugal's move on Wednesday to successfully sell new bonds totalling 1.25 billion euros. All three bond issues were oversubscribed, meaning more bonds were ordered than were available.

Spanish analysts described the country's auction as a success, stressing the fact that it was oversubscribed, even though the yield rose.

The likelihood of Spain needing to be rescued by the European Union and the International Monetary Fund (IMF) was 'zero' right now, said Jose Garcia Cantera, chief executive of the Banesto bank.

The bond auctions from the eurozone's three cash-strapped states helped to ease market tensions surrounding them.

In particular, investor support for Portugal's 10-year bond issue is likely to help Lisbon head off pressure to seek a EU bailout for the time being.

Portugal will issue another 750 million euros in public debt on Wednesday, the public credit institution IGCP announced.

Both the euro and eurozone shares edged up in the wake of Thursday's successful launch of the new Spanish bond issue. At the Madrid stock exchange, the main Ibex-35 index had risen by nearly 1.5 per cent by midday.

Also buoying market sentiment were signs that Europe's political leadership were moving to draw up new plans to allay investors' fears about the debt crisis that has already forced Greece and Ireland to seek an EU-led bailout.

While the eurozone's blue-chip Eurostoxx 50 rose 1.2 per cent to 2,914 points, the common currency crept up 0.5 per cent to the 1.3194 dollars' mark in early afternoon trading in Europe.

But this week's auctions are likely to provide the currency bloc's most indebted nations with only some breathing space.

Analysts say the cash-strapped members of the eurozone will face another major test in April, when a batch of bond redemptions are due.

European officials had been concerned that an eventual international bailout of Portugal could spill over into Spain, which has a much bigger economy. That could have meant a breakup of the 17- member eurozone.

The positive news on Wednesday and Thursday has eased pressure on Spain.

Among Spain's problems are a 2009 budget deficit of 11.1 per cent - well above the strict 3-per-cent-rule for euro member states - and an unemployment rate of about 20 per cent, the highest in the EU.

Italy hopes to have run up a budget deficit last year of 5 per cent. This, the government hopes, should narrow to 3.9 per cent in 2011 and to 2.8 per cent in 2012.

Portugal said this week it had managed to cut its budget deficit by two percentage points to about 7.3 per cent.

All three governments have slashed spending by tens of billions of euros, including cuts in public sector salaries, public investment and social spending, along with tax hikes and a pension freeze.

Spanish Prime Minister Jose Luis Rodriguez Zapatero's government also introduced a controversial reform to make the labour market more flexible.

It is currently trying to persuade trade unions to accept another reform, which would raise the retirement age from 65 to 67 years.

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