Spain covers €3.5bn bonds at high price

MARKETS breathed a sigh of relief after Spain’s €3.5bn (£2.9bn) debt auction was almost twice oversubscribed yesterday, although Madrid was forced to pay a steep premium.

The heavily indebted country was forced to pay investors 4.9 per cent interest on €3bn of shorter-dated bonds, double the rate it paid in May, and 5.9 per cent on €480m of longer-dated bonds, more than four times the rate it paid in March.

Ciaran O’Hagan, a Paris-based analyst at Société Générale, said: “The good demand was only possible after considerable cheapening of the Spanish bonds over the past days.”

Stocks rallied and safe-haven German bunds fell on the news, which came a day after the European Union and International Monetary Fund denied they were arranging a safety net for Spain. The spread between 10-year Spanish bonds and 10-year German bunds narrowed from a Eurozone lifetime record of 238 basis points to 211 points.

Economists hope Spain, which has its central bank led by governor Miguel Ordonez, will not fall into the same vicious circle suffered by Greece earlier this year, when jittery markets cranked up Athens’ borrowing costs to unsustainable levels, pushing the country to the brink.

Gary Jenkins of Evolution Securities said: “The good news is the auction went OK.”