ECB loans help Spain, France

Madrid: Spain enjoyed a blast of positive investor sentiment yesterday with its borrowing costs falling sharply at a debt auction stoked by cheap cash from Europe's central bank, but with a recession looming the glow could fade soon.

It meant Spain has now already raised around 25 per cent of the total it originally planned for this year.

France also sold almost €8 billion (Dh38.4 billion) in longer-term bonds, again at reduced yields, adding to signs that pressure is easing on some of the Eurozone governments struggling in the debt crisis.

Analysts, however, cautioned that investor demand for Spanish bonds was even stronger at auctions in December and January, and prices on the country's debt fell right after the sale, indicating the party could be over.

But Spain has stepped sharply back from the danger zone since November when it had to pay an unsustainable 7 per cent interest to place 10-year bonds.

It is now paying around 5.5 per cent on similar bonds and is no longer mentioned in the same breath with countries such as Greece and Portugal, who had to get bailed out by the European Union.

Although the financial crisis has eased, however, Spain is now sliding into its second recession in four years and the government is forcing through painful austerity measures that are only exacerbating a sky-high jobless rate of 23 per cent.

That means Spain may end up issuing more bonds than it planned this year, which could bring tension back to its bond auctions.

"The impressive performance of Spanish paper comes amid a deterioration in the country's econ-omic fundamentals and a slide back into recession. This is undermining the credibility of Spanish fiscal policy and may lead to higher-than-expected bond issuance later this year," said Nicholas Spiro at consultancy Spiro Sovereign Strategy.

He said the International Monetary Fund believed Spain is unlikely to trim its deficit to less than 6.8 per cent of gross domestic product in 2012, which would force the Treasury to up its borrowing requirements later this year.

In just over a month, Spain's Treasury has completed almost a quarter of planned debt issuance for 2012, taking advantage of yields driven lower by the European Central Bank's injection of almost half a trillion euros of low interest, three-year loans into banks in December.

At Wednesday's auction the Treasury sold €4.6 billion of debt, just above the top end of its target.

Battling the odds