Following Moody's Downgrade Threat, Spain Raises Less Debt Than Expected At Surging Costs

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Following yesterday's threat to the country's Aa1 rating by Moody's, Spain was put in the unpleasant position of having to raise €3 billion in 10 and 15 year bonds. Not surprisingly, the auction was as close to a disaster as it could be, considering it had the ECB's backing. In its final bond auction the country managed to raise just €2.4 billion (€1.782 billion in 10 years and €619 million in 15 years), with the 10 Year yielding 5.446%
and the 15 Year 5.932. These rates compare to 4.615% and 4.541% previously: obviously many are concerned by this massive jumpin rates. The Bid To Covers came at 1.67 and 2.5, compared to 1.84 and 1.44 previously. Obviously, at these rates, ongoing funding for the country is unsustainable considering the internal cost of capital. Luckily, this is the last bond auction for the year for Spain.

Some more on the auction from Bloomberg:

“Spain had to pay much higher yields for this auction, and that’s to be expected in the light of what Moody’s did earlier this week,” said Philipp Jaeger, a fixed-income economist at DZ Bank AG in Frankfurt.

Spain is prefunding for 2011 as it has covered this year’s needs, according to Salgado. The budget shows gross issuance of 192 billion euros for the central government next year, although asset sales announced on Dec. 1 may raise 14 billion euros to help reduce the potential borrowing. Even as Moody’s says the country will meet its budget-deficit goals for 2010 and 2011, the rating company highlighted the risks posed by the banks’ requirement to roll over 90 billion euros of debt.

The extra yield investors demand to hold Spanish 10-year bonds over German bunds rose nine basis points to 251 basis points at noon today in Madrid. That compares with a euro-era closing high of 283 basis points on Nov. 30. The cost of insuring Spanish debt against default fell 5.6 basis points to 318, according to CMA prices.

And with European bank refunding requirements surging well into the trillions in 2011 and 2012, any assumptions that banks now have dry powder to buy sovereign debt in the future will have to be substantially adjusted.