* Bank of Spain governor says budget consolidation key
* Treasury sells 3.2 billion euros of bills, above target
* Yields jump from last sale March 20
* Key test of Spain's debt Thursday at bond sale
By Paul Day and Nigel Davies
MADRID, April 17 Spain must be ready for further
tax rises to rein in its budget, its central bank governor said
on Tuesday, after its debt costs leapt on sliding confidence in
the euro zone's fourth biggest economy.
Two senior European figures joined a chorus of official
voices ruling out a bailout for Spain, which would mark a
critical new phase in the euro zone debt crisis, saying the
country was delivering on economic reforms.
But Spanish central bank governor Miguel Angel Fernandez
Ordonez, weighing in on the centre-right government's deficit
reduction plan for the first time since it was unveiled last
month, said problems raising taxes and outside factors like
growth and inflation could put it at risk.
"The scale of adjustment required in our country is so great
that we need to make use of all the instruments available,
including taxes," Ordonez said, suggesting raising indirect
taxes would be the preferable step.
Short-term borrowing costs almost doubled from a month
earlier at a sale of more than 3 billion euros ($3.92 billion)
of short-term government debt on Tuesday a bad sign for an
auction of 2- and 10-year bonds on Thursday.
Good demand at Tuesday's sale, however, helped nudge 10-year
yields back below the six percent threshold they reached on
Monday on concern over its banking system, deficit and recession
- a point below levels considered unsustainable.
In another positive sign, the International Monetary Fund
saw Spain growing 0.1 percent in 2013 after forecasting a 0.3
percent contraction for next year in January.
Spain's government has acknowledged it is in recession this
year and is fighting to convince sceptical markets it can reduce
one of Europe's highest budget deficits amid huge unemployment.
OUTRAGE AT KING
The depth of the crisis fueled outrage in Spain on Tuesday
over revelations its popular king had gone on an elephant hunt
in Africa. Some commentators called for King Juan Carlos I, 74,
to apologise or even abdicate in favour of his son Felipe.
Speaking to parliament's budget committee, Ordonez said the
government's austerity measures were essential to restore growth
and regain confidence among investors who say its debt costs
will rise unless the European Central Bank resumes bond
purchases after a two-month break, something it has shown no
sign of doing.
"The tensions we have once again experienced in recent weeks
are powerful reminder that the crisis is still far from over and
that our economy's situation remains a particular cause for
concern in Europe," Ordonez said.
German Finance Minister Wolfgang Schaeuble said Spain was
delivering on reforms and the chairman of euro zone finance
ministers Jean-Claude Juncker said investors should take note
that Spain's fiscal consolidation was impressive.
"I would like to invite financial markets to behave in a
rational way," he said. "Spain is on track."
Both ruled out the need for a bailout, as did Ordonez, who
said a new three-year financing operation from the European
Central Bank, which Spain's banks have made liberal use of, was
not being planned. "I don't think it is on the table at the
moment, but anything is possible," he said.
The 2012 budget, passed last month, aims to make savings of
27 billion euros through spending cuts and tax hikes. Ordonez
said it would require a long-touted constitutional change to
ensure budget consolidation by both central government and the
17-regional governments, largely blamed for the 2011 slippage.
"The current budgetary imbalance has become one of the main
obstacles to growth of the Spanish economy. Correcting it is
urgent and unavoidable," the governor said.
Spain was forced to pay a stiff premium compared with a
month ago when it sold 3.2 billion euros of 12- and 18-month
T-bills on Tuesday. The 12-month bill yielded 2.623 percent
compared with 1.418 percent at the last sale in March and the
18-month bill yielded 3.110 percent, up from 1.711 last month.
The sales were in sharp contrast to the country's debt
auctions in the first quarter of the year as banks, backed by a
wall of cheap European Central Bank cash, put some of it to work
in debt of countries at the fringes of the euro zone.
Michael Leister, rate strategist at DZ Bank, said domestic
bank bidding helped on Tuesday but did not change the bigger
picture that much. "The key will be the bond auction on
Thursday," he said.
Spain has eased its debt problem somewhat by selling almost
half its planned issuance of medium and long-term debt for the
year, which gave the treasury some comfort. "The strong demand
indicates the market remains confident in the Spanish economy,"
a treasury statement said.
But international investors continue to steer clear from
Spain's debt, leaving domestic banks as the main buyers.
"Spain likely has a few quarters at best in order to right
the negative sentiment that dominates right now," ING rate
strategist Padhraic Garvey said.
At the end of February, non-residents held 42 percent of
Spanish public debt, the lowest level since 2007 and down from
50 percent in December, treasury figures show.
Analysts said national banks continued to support the
auctions. The bid-to-cover ratio, an indicator of investor
demand was 2.9 on the 12-month bill, compared with 2.1 last
time, and was 3.8 on the 18-month bill, up from 2.9 in March.