Spanish bond auction adds to optimism

SPAIN HAS held a successful auction of five-year government bonds amid a surge of optimism in the markets that the euro zone is beginning to tackle its sovereign debt crisis following bailouts for Greece and Ireland.

While most economists still believe that Portugal will need to seek assistance from the EU and the IMF, they are divided about the prospects for the much larger Spanish economy, regarded by pessimists as next in line for a rescue if Portugal succumbs.

“It has become a European crisis, it’s not just a Spanish crisis,” said David Stix, a Madrid-based broker.

Spanish finance minister Elena Salgado was among those who rejected the idea of a bailout for Spain. While telling CNBC that euro zone countries needed to work together to “improve our economic governance”, she added: “But if you are talking about a bailout, definitely not.”

José García Cantera, chief executive of Banesto, a domestic Spanish bank controlled by Santander, agreed.

“The probability that Spain needs some sort of rescue package is zero,” he said after announcing a fall in the bank’s profits for 2010.

“As the government shows the public deficit targets are achieved and as the banks show that they can cope with the real estate problems in an orderly manner, confidence will be restored.”

Spain, which estimates it needs to raise €94 billion in new sovereign debt and refinancing this year, appears to have persuaded investors that it has its budget deficit under control and is likely to succeed in cutting it to 6 per cent of gross domestic product this year, from 11.1 per cent of GDP in 2009 and less than 9.3 per cent in 2010.

Analysts and economists, however, have turned their attention to the need to recapitalise the domestic banking system, which is still suffering from a hangover of bad loans after the bursting of the property bubble. They also doubt Spain’s ability to improve competitiveness sharply and return to robust economic growth.

In its first sovereign bond sale of the year, Spain sold €3 billion in bonds – at the top of the €2 billion to €3 billion range it wanted to raise – amid solid demand.

The auction came a day after neighbouring Portugal managed to raise €1.2 billion in long-term debt. – Copyright The Financial Times Limited 2011