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Spain sails past debt test after Portugal bailout approved

T-bill tender result bodes well for Madrid's upcoming bond sale

Spain successfully returned to the sovereign debt market on Tuesday, a day after euro-zone finance ministers approved a 78-billion euro bailout loan fOR Portugal.

The Treasury said it issued 5.474 billion euros in 12- and 18-month bills at lower yields after borrowing costs had risen at the five previous tenders. The amount awarded was just short of the maximum target of 5.5 billion euros amid strong demand.

The government's debt management agency sold 4.272 billion euros in 12-month paper at a marginal rate of 2.568 percent, down from 2.900 percent at a tender held on April 18. Demand for the issue came in at 10.675 billion euros. It met 1.201 billion euros of bids worth 4.955 billion euros for the 18-month tranche as the cut-off rate dropped to 3.129 percent from 3.496 percent.

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Market players said they were surprised by the strength of the bid-to-cover ratio, a factor that augurs well for 10- and 30-year bond tenders due to be held on Thursday.

Spain's risk premium was also steady after Tuesday's auction at 214 basis points, compared with levels for bailout recipients of over 1,200 basis points for Greece, over 700 for Ireland and 560 for Portugal.

"Spain has done a decent job in decoupling from Greece, Portugal, Ireland," Reuters quoted 4Cast economist Jo Tomkins as saying. "That's not to say Spain's out of the woods, but we are seeing a little more of a separation between the two groups."

Portugal is due to receive a first leg worth 18 billion euros of the emergency funding agreed by the European Union and the International Monetary Fund at the end of May or the beginning of June. That will allow it to meet hefty bond redemptions due on June 15.

Tuesday's meeting of the Eurogroup was overshadowed by the arrest of IMF Managing Director Dominique Strauss-Kahn in New York on charges of sexual assault.

Of the 78 billion euros heading for Lisbon, 26 billion euros will come from the IMF and the balance from the EU. Portugal will pay between 4.25 and 5.25 percent on the IMF tranche and between 5.5 and 6.0 percent on the EU's share of the loan.

Portuguese Finance Minister Fernando Teixeira dos Santos said yesterday that according to current market conditions, the overall rate on the loan would average about 5.1 percent.

Portugal also agreed to encourage private investors to maintain their overall exposures to the country on a voluntary basis, one of the demands of Finland for its support for the package.

Spanish Economy Minister Elena Salgado said Tuesday Spain would offer guarantees of between 4.5 and 5 billion euros on the repayment of the funds lent to Portugal.

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