Record borrowing of cheap long-term funds from the European Central Bank by Spanish lenders underpinned the Treasury's auction of short-term paper on Tuesday as the markets shrugged off Moody's latest downgrade of Spain's sovereign rating.
Largely cut off from the wholesale funding markets, Spanish banks tapped the ECB in January for a daily average of 133.2 billion euros, similar to the levels seen in July of 2010 during a critical phase of Greece's debt problems.
As part of its so-called "open-bar" policy, the ECB at the end of December offered to lend banks in the euro-zone area unlimited sums of three-year money at an interest rate of 1 percent. Dealers said banks are using those funds to buy largely short-dated Spanish government debt at higher rates, thereby making a quick and relatively safe profit.
This has eased the Treasury's task of covering Spain's borrowing needs, and Tuesday's auction of 12- and 18-month bills was no exception. The Economy Ministry's debt-management arm sold 5.445 billion euros in the two issues at lower rates, amid heavy demand of 13.885 billion.
Specifically, the Treasury issued 2.943 billion in 12-month paper at a cut-off rate of 1.949 percent, down from 2.150 percent at the previous tender of the same maturity. It sold a further 2.502 billion euros in 18-month bills, as the marginal rate declined to 2.395 percent from 2.490 percent.
The Treasury has taken advantage of improved market conditions to push ahead with its debt issue schedule for the year, placing 29 billion euros since the start of 2012.
Figures released Tuesday by the Bank of Spain showed that Spanish banks substituted longer term debt for shorter in January. Domestic lenders accounted for 22 percent of the long-term borrowings of euro-zone banks in the month. Banks in Italy, which also held a successful debt auction on Tuesday, took up a further 28 percent of ECB long-term debt.
"The glut of liquidity put in by the ECB is trumping [...] fundamentals, which is why we believe Spain and Italy are getting away with these auctions at the levels they are," Reuters quoted Rabobank strategist Lyn Graham-Taylor as saying.
One of the reasons cited by Moody's on Monday for lowering Spain's sovereign rating by two notches to A3 from A1 was doubts about the government's ability to meet its deficit target for this year of 4.4 percent after a shortfall of 8 percent the previous year. "Moody's is skeptical that the target can be achieved and expects the general government budget deficit will remain between 5.5 and 6 percent," the ratings agency said, adding that it expects the Spanish economy to shrink 1.5 percent this year.
In remarks Tuesday to local radio station Onda Cero, Finance Minister Cristóbal Montoro said he found it "paradoxical" and "contradictory" that Moody's cut Spain's rating just after praising the Popular Party government for the structural reforms - such as the overhaul of the labor market - it has introduced in the short period of time it has been power.