Spain's short-term costs of borrowing jumped by around half a percentage point at an auction today, but strong demand eased markets' immediate concerns and prodded the euro higher.
The treasury sold €1.97 billion of the short-term bills with the average three-month yield jumping to 1.371 per cent compared to 0.899 per cent in March and six-month rates to 1.867 percent from 1.361 per cent.
Both auctions were heavily oversubscribed - by factors of 4.4 and 7.1 respectively - easing some concerns among investors worried Spain may be the next to suffer in a still expanding European debt crisis.
"Although these yield levels are perhaps still currently more cause for concern rather than outright alarm, there is little scope for further such increases in short-dated funding costs before the market begins to get spooked over the prospect of Spanish contagion," said Rabobank rate strategist Richard McGuire.
Speculation Greece may have to restructure its debt, denied by officials, and talks on the euro zone's third bailout in a year in Portugal have pushed up Spain's refinancing costs and fuelled concerns it may be next.
The European Union's and International Monetary Fund's collective bailout vehicle, the European Financial Stability Fund (EFSF) could be severely stretched if Spain, the region's fourth largest economy, was forced to seek aid.
Simmering doubts over the Spanish economy and rising interest-rate expectations - the three-month Euribor rose to its highest in almost three years today - pushed up short-term debt rates.
Madrid has addressed warnings of an unsustainable public deficit and an economic model over-reliant on a near-defunct property sector with a slew of austerity measures and structural reforms, but long-term worries continue.
Yields leapt at an auction of longer-tailed debt maturing in 2021 and 2024 in mid-April as investors demanded higher risk premiums, but rates on the 10-year paper held below the upper end of the recent range of 5.6 per cent.
The housing sector collapse almost three years ago has pushed unemployment to more than double the EU average and smashed its banks, which some say face a capital shortfall of over €100 billion, or around 10 per cent of gross domestic product.
However, with debt-to-GDP ratio around 20 percentage points below the euro zone average of 60.1 per cent in 2010 according to Eurostat, Spain could absorb the worst-case-scenario bank recapitalisation if necessary, economists say.
Reuters
