- Published on Thursday, 21 June 2012 08:00
- Written by Adam English, Associate Editor, Inside Investing Daily
- Hits: 400
Spain's latest bond sale didn't work out too well. The country was forced to offer a 5.07% interest rate for 12-month bonds and a 5.11% rate to sell 18-month bonds.
It is an increase of 200 basis points from a similar bond sale last month.
The bond market is pricing in the risk of Spanish debt. In spite of the 100 billion euro ($126 billion) bailout deal for Spanish banks, investor confidence is getting worse.
"The decidedly elevated yield levels leave a question mark firmly in place as regards the sustainability of Spain's public finances while doing nothing to temper speculation as to how long the country might hold out before looking for a more comprehensive bailout," said Rabobank strategist Richard McGuire.
Of course, a more comprehensive bailout would go straight into Spain's pile of debt.
The 100 billion euro bailout earlier this month added another 10% to Spain's debt-to-gross domestic product ratio. The ratio was already expected to hit 80% at the end of 2012, up from 68.5% at the end of 2011.
Spain's Finance Minister Cristobal Montoro told Parliament that Spain won't need the same kind of assistance as Greece, Ireland or Portugal "because it does not need to be rescued."
That position may be hard to maintain.
The bailout mirrors efforts to stabilize Greece. Needless to say, that hasn't done much of anything except temporarily prop up Greek banks.
A large batch of three- and five-year bonds will be auctioned in the next couple of days. If bond rates continue to rise, there is a real risk that Spain will be effectively cut off from credit markets.
Investors clearly were not impressed by the efforts to save the Spanish banking system. The ECB will have to find a way to boost investor confidence very soon if they are going to avoid pumping more cash into Spanish banks by the end of the year.