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UPDATE 2-Spain debt woes weigh on state, Santander
August 21, 2012 / 12:26 PM / 5 years ago

UPDATE 2-Spain debt woes weigh on state, Santander

* Treasury sells 4.5 bln euros of 12-, 18-mth bills

* Yields fall on both compared with July auction

* Banco Santander to pay around 4.5 pct to sell 2-year bond

* Euro rescue fund sells 6-month bill at negative yield

By Paul Day

MADRID, Aug 21 (Reuters) - Spain’s government and its largest bank felt the impact on Tuesday of doubts about the country’s ability to avert a sovereign bailout, forking out high premiums to sell debt in nervous markets.

Meanwhile, risk-averse investors paid for the privilege of parking their money for six months with the euro zone’s rescue fund, financed mainly by its more stable economies - illustrating the yawning yield gap that divides the euro zone’s core from its periphery.

The Treasury in Madrid sold 4.5 billion euros ($5.6 billion) of 12- and 18-month T-bills at significantly lower yields than last month as investors bet the European Central Bank will intervene on bond markets.

But a lack of detail over when and how the bank will act meant Spain’s borrowing costs remained punishingly high, with the yield on the shorter paper falling to 3.070 percent from 3.918 percent in July.

“The focus is very much on the ECB’s pledge of intervention, in combination with (euro zone rescue fund) the EFSF,” Deutsche Bank economist Mark Wall said.

“Markets appear to be giving the benefit of the doubt to that money hitting the markets but there’s a lot left to be revealed.”

Spain’s debt servicing costs remain uncomfortably high because investors are unnerved by uncertainties over whether Madrid will need to apply for a full sovereign bailout. That would stretch existing European Union funds and likely transfer much of the market pressure to the larger Italian economy.

Despite its strong presence outside Spain, those concerns also weighed on Santander, Iberia’s as well as the euro zone’s largest bank, which was placing a two-year unsecured bond on Tuesday on which it was expected to pay interest of around 4.5 percent.

That represented a hefty premium to recent debt issues by some of its main competitors.

Last week, French bank BNP Paribas paid around 2.5 percent to issue debt over seven years, while Svenksa Handelsbanken - the leading lender in economically resilient Sweden - paid 2.625 percent over 10 years.

The EFSF rescue fund - financed proportionally by euro zone states according to the size of their economies - did even better on Tuesday, selling 1.5 billion euros of a new 6-month bill on Tuesday at a yield of -0.018 percent.

CRUNCH TIME

Spain’s Treasury will not sell longer-dated debt until Sept. 6, the same day the ECB is expected to detail its plans for addressing the euro zone’s debt crisis, and Prime Minister Mariano Rajoy hosts German Chancellor Angela Merkel in Madrid.

Rajoy opened the door to applying for sovereign aid earlier in August, but said first he needed to know the conditions and more about the ECB’s plans to help deflate debt costs for Europe’s southern economies.

Yields on Spain’s 2-year debt have fallen particularly sharply in the secondary market in the last few weeks on expectations the ECB will concentrate any debt purchases on shorter maturities.

The bloc’s fourth largest economy saw financing costs soar to near euro-era highs last month on concerns it may take years to recover from a housing bubble that burst in 2008 and is too weak to digest massive public and private debts.

The country has already applied for a rescue of up to 100 billion euros to help capitalize its banks, battered by bad loans from the construction sector and consumer demand undermined by record high unemployment of almost 25 percent.

On Tuesday, the premium investors demand to hold benchmark Spanish 10-year debt over its German equivalent fell to 468 basis points after the t-bill auction, down around 13 points on the day.

The Treasury sold 3.5 billion euros of the 12-month bills, at a bid-to-cover rate that fell to 1.9 after 2.2 last month.

It sold 982 million euros of the 18-month bill, which was 4 times subscribed compared with 3.7 times in July. The yield fell to 3.335 percent from 4.242 percent in July.

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