ECB intervention pulls Spain back from the bailout brink
Risk premium rose close to 500-basis-point mark; Salgado says Spanish debt situation is safe as Zapatero demands European solution; Treasury forced to offer 7.088 percent at 10-year tender
Unrelenting pressure in the secondary market forced the Spanish Treasury at Thursday's 10-year bond auction to offer a yield of over seven percent, raising the specter that Spain could be the next euro-zone country in need of a bailout.
With only three days to go until the general election on November 20, heavy selling of Spanish government bonds pushed the risk premium to just under 500 basis points, upping the ante for the Treasury at the auction.
Shortly after the outcome of the tender, the differential between the yield on the benchmark Spanish 10-year government bond and the German equivalent stood at 499 basis points, yet another euro-era high. The risk premium eventually closed little changed at 459 basis points after the European Central Bank intervened in the secondary market by buying Spanish government bonds.
"The markets sense the euro zone is wounded and they're attacking it, particularly at its weakest flanks"
The Treasury sold 3.562 billion euros (89 percent of its maximum target) in 10-year bonds at a marginal rate of 7.088 percent, the same level that Greek bonds with the same maturity were trading at in May of last year before the Hellenic country became the first in the euro zone to seek financial aid from the IMF and the European Union.
The cut-off rate at Thursday's tender was the highest since 1997, and when compared with the 5.453 percent paid at the previous 10-year tender, held on October 20. The bid-to-cover ratio fell to 1.54 times from 1.76 times in October.
Spain was not alone in suffering the ferocity of the markets. The French Treasury also had a testing time at a bond tender held Thursday as the country's risk premium moved above 200 basis points for the first time since the euro was introduced.
"With these yields, we're at a critical moment in terms of the cost to our economy, but it's not just a problem for Spain," Reuters quoted Santiago Sánchez Guíu, the coordinator for economic studies at the Flores de Lemus Institute attached to Carlos III University in Madrid, as saying. "The markets sense the euro zone is wounded and they're attacking it, particularly on its weakest flanks."
"The crisis is being driven by systemic causes and until that systemic weakness has been addressed, all euro government bonds, aside from [German] bunds will continue to come under pressure," Bloomberg quoted Richard McGuire, a fixed-income strategist at Rabobank International in London, as saying.
Outgoing Prime Minister José Luis Rodríguez Zapatero also called on the Council of the European Union and the ECB to find a solution to the crisis. "[It's up to Europe] to take the reins and not two or three governments," he said.
Economy Minister Elena Salgado ruled out the chance of Spain having to go the way of Greece, Ireland and Portugal in seeking help from the International Monetary Fund and the European Union to resolve the crisis.
In remarks made to radio station Cadena Ser, the minister said the sustainability of Spain's debt situation is "not in question." The government had budgeted interest payments on its debts for this year of 27 billion euros, whereas the actual figure will be less than that," she said.
"Even with the tensions [in the market] we will pay three billion euros less than that, so the debt situation is perfectly sustainable, although we would like to be paying less because the fundamentals of our economy indicate we should be paying less," Salgado said.
The minister said the solution to the crisis has to be coordinated within the EU, pointing to the fact that the debt of 12 of the 17 euro-zone member countries had been subject to systemic attacks in the market.
There have been calls for the European Central Bank to follow the United States and Britain by launching quantitative easing that would involve massive purchases of euro-zone bonds. Germany, however, is opposed to this, arguing it does not form part of the ECB's mandate.
"Those who believe that the ECB as a lender of the last resort can resolve the weaknesses of the euro zone are proposing something that cannot work," German Chancellor Angela Merkel said Thursday.
European Commission spokesman Amadeu Altafaj attributed the turmoil in the markets to uncertainty. "When it comes to the situation of spreads, not only for Spain but also for other euro-area countries, it no doubt reflects uncertainties [in the markets]," Altafaj told reporters in Brussels. This can only "underline the importance of implementing the agreements, especially those of the October summit," he added.
Arturo Fernández, the vice chairman of the Spanish Confederation of Business Organizations (CEOE) - the country's largest employer group - said a risk premium of over 500 basis points put Spain on the "edge of an abyss." Fernández said interest rates at this level are not "sustainable," but insisted Spain is in a better position than Greece and Portugal to avoid "what no one wants: a bailout."
Fernández said that if the opposition conservative Popular Party, led by Mariano Rajoy, wins the elections it will help "restore the confidence of the markets," although no miracles should be expected. "Mariano Rajoy is not Our Lady of Lourdes."
Rajoy described the current levels of Spain's risk premium as "astronomical and terrible," saying it meant the country had to service its debt with funds that would be better employed in enhancing competitiveness and creating jobs.