Spanish treasury faces tough test

12:12, June 15, 2010      

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The Spanish treasury will face in July a major and decisive test to answer the mounting concerns over its solvency.

Investors fear the treasury has inadequate funds to buy back the national bonds of 24 billion euros (29.39 billion U.S. dollars), while analysts believe Spain will be able to meet the deadline and will have to offer a higher interest rate than more solvent EU countries like Germany, France or Britain.

While the debt crisis is expanding, Spain's counter-deficit remains uncertain with its credit ratings downgraded. The World Bank last week referred to its financial situation as "very serious."

Spain's debt risk premium escalated on Tuesday to unforeseen levels in 20 years. The spread between the Spanish 10-year securities and the German bonds reached an all-time high this week to 215 basis points, which means Spain will need to pay twice as much as Germany to finance itself.

However, Spain's Secretary of State for Economic Affairs Jose Manuel Campa said Spain has no problem in facing these costs, which reflects the government is as confident as it was in January when debt redemption was even greater.

Nevertheless, governmental income is still far behind its expenditures with additional 120 billion euros (146.89 billion dollars) to cover projected financial needs this years.

The Spanish treasury issued on Thursday three-year government bonds of 3.9 billion euros (4.77 billion dollars). Despite the increasing risk premium, 50 percent of demand was by foreign investors. The Ministry of Finance said Thursday's auction was "a sign that investors continue to have a big interest in Spain's public debt."

The debt market could thus take a breath due to the strong bonds demands with the interest rates of the 10-year securities dropped to 4.510 percent and the spread with the German bonds fell to 190 basis points.

The European Central Bank (ECB), which would maintain interest rates at a historic low of 1 percent, said it will maintain three-month liquidity auctions given the financial difficulties faced by several banks.

"We have decided to adopt an auction procedure at fixed rates with full allocation in three-year refinancing operations corresponding to the 28 of July, the 25 of August and the 29 of September", said the ECB President Jean-Claude Trichet.

Spain's benchmark index, the Ibex-35, saw a 7.15 percent rise from June 7 to 11, closing at 9.560 points. The financial sector, one of the most penalized during the last few months, took the lead in the Madrid stock exchange.

Banco Santander, the biggest Spanish lender, announced during its shareholder's meeting on Friday that profit this year will be similar to that of 2009 and the same is true of dividend.

Source: Xinhua


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