Global investors voiced their doubts over Spain's attempts to control its debt Wednesday when the country's first bond auction since it unveiled a harsh round of cuts failed to raise the target amount and its borrowing costs for its long-term debt increased.
In an auction of medium-term debt, Spain sold 2.6 billion euros ($3.5 billion) - short of its 2.5 euros billion to 3.5 billion euros target in the sale of notes maturing in 2015, 2016 and 2020. There have been concerns in Europe in recent weeks that Spain will be joining the ranks of Greece, Portugal and Ireland in seeking a bailout. The yield - the interest rate a country has to pay on its debt and an indication of risk - on Spanish 10-year bonds has been rising in recent weeks and stood at 5.51 percent in the secondary market shortly after Wednesday's sale, compared to 4.9 percent a month ago. The higher the yield, the more expensive it is for a country to raise money on the bond markets. Last November, Spain's yield hit 6.7 percent - close to the point where a country can no longer afford to maintain its debt and seek a bailout. The bond sale came a day after Finance Minister Cristobal Montoro spelled out the details of the new conservative government's 2012 budget proposal, an austere blueprint that aims to get Spain's deficit down from 8.5 percent of gross domestic product last year to 5.3 percent this year. The cuts are being introduced at a time when the country's economy is shrinking and expected to contract 1.7 percent on the year. The government also revealed Tuesday that Spain's national debt will shoot up this year from 68.5 percent of GDP to about 80 percent. In Wednesday's auction, the average interest rate on the three-year notes was 2.89 percent, up from 2.44 percent in the last such auction on March 15. The bid to cover ratio was 2.4, half what it was in the last auction.
Meanwhile, Portugal has raised 1.5 billion euros ($2 billion) in a pair of debt auctions at a manageable cost, in a further sign that the bailed-out country is recouping investor confidence. Portugal needed a 78 billion euros ($102.7 billion) financial rescue almost a year ago when its heavy debts and weak growth led investors to demand unaffordable returns.