Treasury exceeds bond issue target on heavy demand

Fitch says Spain faces high probability of downgrade

The Spanish Treasury surpassed its issue target at Thursday's bond auctions amid heavy demand despite more negative comment from ratings agencies.

The Economy Ministry's debt management arm sold 6.609 billion euros in four-, seven- and 10-year bonds when it was looking initially to place only 4 billion. Bids totaled 15.342 billion euros.

The tender was held as Fitch questioned the government's ability to meet its deficit-reduction target for this year and warned there was a strong possibility that it would cut its sovereign rating. At the same time, Standard & Poor's indicated it had been generous in only downgrading its rating for Spain by two notches to A last Friday.

The Treasury awarded 1.3 billion euros in bonds maturing in 2016 at a marginal rate of 4.050 percent, down from 4.643 percent at an auction earlier this month. It sold a further 2.3 billion euros in seven-year bonds as the cut-off rate declined to 4.643 percent from 5.147 percent in November. It issued a further 3.009 billion euros in 10-year bonds as the marginal yield fell to 5.466 percent from 7.088 percent in November.

ING Bank: "Spain is showing there's still ample demand for their paper"

Spain's risk premium closed Thursday practically unchanged at 337 basis points.

Analysts attributed the success of the auction to the massive injection of liquidity by the European Central Bank at the end of last year.

"Spain is showing the market there's ample demand for their paper," Bloomberg quoted Padhraic Garvey, head of developed markets debt strategy at ING Bank in Amsterdam, as saying. "The result is perfectly in line with the sentiment we've seen over the past couple of weeks. The ECB measures obviously help."

At a presentation in Madrid Fitch's managing director for sovereign debt, Edward Parker, said the ratings of Spain and five other euro-zone countries put under review last month will likely be cut soon.

Fitch currently rates Spain AA- and a two-notch cut would reduce its rating to A, which is still investment grade.

Parker said he had "doubts" about the new Popular Party government's ability to hit its deficit target for this year of 4.4 percent after Spain missed its goal for last year of 6 percent by two full percentage points.

Parker pointed in particular to the problems the central government is having in controlling spending by the regions, which were largely responsible for the blowout in the country's finances last year.

The performance last year "casts much more doubt about its capacity to hit budget targets for this year and in 2013 to bring the budget deficit down to a sustainable level," he said.

At the end of last year, the government announced tax hikes and spending cuts worth some 15 billion euros to address the shortfall in its finances.

While acknowledging the fiscal effort being made by the government, Parker said there are still problems with public finances and bank assets, while the labor market remains "dysfunctional."

Parker said a break-up of the euro zone this year could not be ruled out given the inability of European leaders to find credible solutions to the debt crisis.

In an interview Thursday with Business TV, Myriam Fernández de Heredia, the head of sovereign ratings for S&P in Europe, the Middle East and Africa, said that judging by market prices for Spain's debt, the country's rating should be non-investment grade instead of A.

"The implicit rating for the risk premiums that Spain is currently paying is non-investment grade- a double BB- which would be six notches below the actual rating for Spain, which is an A," she said.

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