Treasury obliged to sell bonds at pre-euro levels

Spain was obliged on Thursday to pay the highest rates in 14 years to sell government bonds at an auction held just before the start of a euro-zone summit on a second bailout package for Greece.

The highest borrowing costs Spain has seen at a debt tender since 1997 — before the euro came into existence — was the price the Treasury had to pay in order to meet its targets for the auction. It sold 1.807 billion euros in 10-year bonds, compared with demand of 3.429 billion euros, at a marginal rate of 5.921 percent, up from 5.409 percent at the previous auction for 10-year paper held in May. It sold a further 814 million euros in 15-year bonds at a cut-off rate of 6.218 percent, up from 6.043 percent in June.

"The result was mixed, edging on positive," Reuters quoted Corstal Consors economist Estefanía Ponte as saying. "The bid to cover ratio fell in both cases, but the 10-year bond was placed at a good yield for the Treasury, given the market context."

The euro-zone peripheral sovereign debt markets have been under heavy pressure of late because of uncertainty over how the Greek debt crisis would pan out. However, the spread between the yield on the Spanish benchmark 10-year government bond and the German equivalent narrowed 21 basis points on Wednesday to 321 after having hit a euro-era high of 376 basis points last week.

After Thursday's auction, the debt premium was trading at around 317 basis points after having opened at 314 basis points.

The key to getting the euro project back on an even keel again rests on finding a way to make Greece's debt servicing sustainable.

According to Reuters, euro-zone leaders had agreed to extend the maturity of loans to Greece from 7 years to 15 and cut the interest charged on those loans to 3.5 percent from 4.5 percent. Portugal and Ireland would also benefit from those measures. Also on the table is the possible repurchase of Greek government bonds.

The report sparked a rally in the European financial markets. The Spanish blue-chip Ibex 35 closed up 2.93 percent at 10,017.60 points, leading the rest of Europe higher, with the Euro Stoxx 50 index up 2.13 percent. The euro rose against the dollar, while the Spanish risk premium ended the day at 285 basis points.