Spanish Treasury foots bill for Irish and Portuguese woes

With Ireland seemingly moving closer to accepting some sort of European rescue package and a similar denouement being touted for Portugal, the Spanish Treasury was forced to jack up interest rates at Tuesday's bill auctions.

The government's debt management office issued 3.731 billion euros in 12-month paper at an average yield of 2.636 percent, up from 1.842 percent at the previous tender on October 19. It also sold 1.243 billion euros in 18-month bills with the average yield rising to 2.664 percent from 2.009 percent.

The total amount issued of 4.975 billion euros was at the midpoint of the Treasury's target range of 4.5-5.5 billion euros. The bid-to-cover ratio for the 12-month bills was 1.9 times, down from 2.06 times at the previous tender, while the ratio for the 18-month issue rose to 3.66 times from 2.03.

The auction took place just ahead of a meeting of euro-zone finance ministers in which some sort of bailout for Ireland was expected to be the main talking point. Dublin seems reluctant to submit itself to the ignominy of seeking assistance from the EU or the IMF to help the country service its heavy debt burden, but is more open to the idea of external funding for its liquidity-strapped banks.

Speaking ahead of the euro-zone finance ministers' meeting, the vice president of the European Central Bank (ECB), Vítor Constâncio, said it was up to Ireland to decide which way it wanted to go, as was the case for Portugal. However, judging by the outcome of Tuesday's bill auctions, Spain clearly would like to see a swift solution to the Irish problem.

"What's important is that Ireland makes a decision as soon as possible," the Spanish secretary of state for finance, Carlos Ocaña, told reporters.

Ocaña predicted Spain's risk premium would fall once the uncertainty surrounding Ireland and Portugal was lifted. Spain also suffered some contagion from the Irish woe, with the spread between the yield on the Spanish 10-year government bond and the German bund hitting record highs last week before easing to around 200 basis points.

Ocaña insisted the markets were able to differentiate between Ireland, Portugal and Spain, which "has a more solid financial sector, and a business structure that has weathered the crisis reasonably well." He also said the public finances of the three countries were in different situations, with "Spain getting through the turbulence of the past few years with some comfort."