Spain has successful bond sale after tough week

A homeless person sleeps in the doorway of a bank in Madrid Thursday June 7, 2012. Spanish Prime Minister Mariano Rajoy pleaded with European leaders "to support those that are in difficulty" and push toward greater fiscal unity - a step that might allow its troubled banks to get direct financial help. The call comes although Spain insists it doesn't need outside aid. (AP Photo/Paul White)

A homeless person sleeps in the doorway of a bank in Madrid Thursday June 7, 2012. Spanish Prime Minister Mariano Rajoy pleaded with European leaders "to support those that are in difficulty" and push toward greater fiscal unity - a step that might allow its troubled banks to get direct financial help. The call comes although Spain insists it doesn't need outside aid. (AP Photo/Paul White)

MADRID (AP) ? Spain raised ?2.1 billion ($2.62 billion) Thursday from the bond markets ? but investors demanded a higher interest rate out of concern that the country's troubled banks were weighing heavily on government finances.

The successful sale of medium and long-term debt came just days after Spain made its most explicit signal that it needs help from Europe for its struggling banks while Finance Minister Cristobal Montoro warned that the high interest rates demanded by investors on Spanish debt in recent weeks indicated "the door to the markets is not open for Spain."

Spain's banks are saddled with billions in soured property investments following the bursting of the country's real estate bubble. At the end of May, the most stricken lender, Bankia S.A., said it needed ?19 billion in government aid to shore up its finances against losses on its toxic home loans. But Spain only has ?5 billion left in a ?19 billion fund that it established in 2009 to help banks and has not mapped out a plan for raising the extra funds.

Estimates have put the cost of a complete bailout for the Spanish banking sector between ?40 billion and ?100 billion.

Spain would like to get European aid for its banks but is reluctant to ask for it because under current rules the aid would have to be given to the government. That would allow Brussels to dictate policies to Madrid, something the Spanish government is keen to avoid. It would also further hit investor confidence, sending interest rates on its bonds even higher.

The interest rate on Spanish debt has soared in recent weeks to as high as 6.7 percent on fears over the country's creditworthiness. A rate of 7 percent is considered by market-watchers as unsustainable over the long term ? and the point at which Greece, Ireland and Portugal had asked for a bailout.

"There is talk on the start of different solutions, but there's still nothing concrete," said Antonio Barroso, an analyst with the Eurasia Group political risk consulting group. "And I think that's why markets are still a little bit hesitant."

The country has become the focus of Europe's debt crisis because bailing out the eurozone's fourth-largest economy would likely stretch the region's finances to breaking point.

However, there have been reports that European Union officials have been exploring ways to inject funds into the country's fragile banking sector without imposing strict conditions. The Financial Times said Wednesday that such a move could make the Spanish government less reluctant to accept international assistance.

Officials in Brussels are reported to have been looking at the conditions of the European Union's existing bailout fund, the European Financial Stability Facility. At a summit meeting in Brussels last July, EU leaders approved a measure allowing the bailout funds to lend money to recapitalize banks in countries that are not already receiving bailouts ? such as Spain.

The money would have to be funneled through the government. But because the money is meant to help troubled financial institutions rather than the government, the conditions attached to the bailout loan would not have to be as over-arching as those attached to government bailouts, such as in Greece and Ireland.

Instead, according to the guidelines adopted in July, they could be "more focused."

However, the country in question would be ultimately responsible for repaying the loan, and would have to show that its economic policies are sound enough to allow it do to that.

Economy Minister Luis de Guindos said Wednesday that a decision on recapitalizing the sector would be made after two international auditing firms contracted to pinpoint the extent of the troubled banks' problems issue their reports at the end of the month. An IMF report on the banks will be completed next Monday.

The Spanish government has said that the amount of money needed to prop up the sector is not excessively high and would be easily manageable under a system of greater Europe banking unity.

Wednesday's bond sale saw strong demand for the country's 10-year bonds ? about 3.3 times the amount on offer. The Treasury also sold bonds maturing in 2014 and 2016.

The Treasury paid an average interest rate of 6 percent to sell ? 611 million in key 10-year bonds, up from 5.7 percent in the last such auction April 19. The rate is still lower than the 6.1 percent being demanded on the secondary market, where issued bonds are traded openly and the rate is seen as an indicator of investor wariness.

However, some analysts said that the maximum amount sought by the Treasury in the auction ? ?2 billion ? was so small it made the sale almost symbolic.

"At such a low figure, it was highly unlikely that the targeted amount would not be reached, "said Javier Flores, an analyst in Spain with Asinver investment group.

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Alan Clendenning and Daniel Woolls in Madrid and Don Melvin in Brussels contributed to this report

Associated Press

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