Eurozone breathes easier as Spain passes debt test

Madrid: Spain passed a pivotal test in its first bond auction of 2011 yesterday, spurring hope it can avoid an emergency bailout that would rock the entire Eurozone.

Italy soothed European debt concerns, too, raising its maximum target of €6 billion (Dh28.6 billion) in bonds yesterday. On the five-year bonds sold, it paid 3.67 per cent, lower than the market rate on Wednesday's close but up significantly from the previous auction November 12.

Spain proved it can tap the financial markets for money, selling its maximum target of €3 billion in five-year bonds with demand outstripping supply by two-to-one, a fairly comfortable ratio.

The Treasury forked out an average interest rate of 4.542 per cent to lure investors, a competitive rate when compared to Wednesday's market close of 4.767 per cent. Nevertheless, it was sharply up from the 3.576 per cent Spain paid at the last year five-year bond auction on November 4, a few weeks before debt-stricken Ireland was forced to seek an EU-International Monetary Fund (IMF) bailout.

"The issue went very well, with much more demand than at the last auction in November," said Jose Carlos Diez, chief economist at leading bond dealer Intermoney Valores.

Liquidity cushion

"The likelihood of a rescue plan for Spain is very low because there is a good liquidity cushion," he said.

Spanish stocks rallied in relief. After leaping 5.42 per cent on Wednesday following a successful bond sale by Portugal, the Madrid stock exchange's Ibex-35 index was up another 2.74 per cent mid-afternoon, led again by soaring bank shares.

Portugal, widely feared to be the next victim of the European debt quagmire, had eased the way with a bond auction on Wednesday when it raised €1.25 billion at rates below the key threshold of 7 per cent.

Despite the market enthusiasm, independent Barcelona-based economist Edward Hugh said that the Spanish and Portuguese bond sales had done no more than buy some time.

"This week's news is not really important. They got basically another week, they have until their next bond sales," Hugh said.

Investor sentiment for the Spanish and Portuguese bond sales had been boosted by Wednesday's news that the German economy expanded 3.6 per cent last year, the strongest gain since reunification in 1990, he said.

The rebound