MADRID |
(Reuters) - Spain's 10-year borrowing costs are likely to fall sharply at an auction on Thursday compared with a month ago but remain uncomfortably high as Prime Minister Mariano Rajoy holds back from requesting a rescue that many regard as inevitable.
Just two days after selling 4.6 billion euros (3 billion pounds) of short-dated debt, the Treasury will test demand for Spanish risk in the tougher 10-year maturity and sell a new three-year bond, aiming to raise 4.5 billion euros in total.
The yield on the benchmark 2022 bond is seen falling to around 5.75 percent according to analysts, close to its lowest level in four months, and down from 6.65 percent when it was last sold on August 2. The new 2015 bond was quoted at around 3.9 percent in the grey market on Wednesday, an indication of where it is likely to sell.
But recent relief from market pressure may not last if Madrid fails to make the request for an international package that would allow the European Central Bank to buy its bonds and keep its funding costs at affordable levels.
Spain is at the heart of the euro zone debt crisis, now in its third year, with investors concerned it will not be able to bring down its massive public deficit and control its soaring debt in the midst of a harsh and prolonged recession.
As well as reassuring investors it will be able to meet repayments on its debt, a bailout would mean fiscal targets the country has consistently missed in recent years are subjected to more rigorous control, analysts say.
"The auction should not be a problem for Spain. But markets want to see more credibility to Spain's fiscal targets, which could be better assured under a rescue package, and ease the threat of losing its investment grade (credit ratings)," said Orlando Green, strategist at Credit Agricole.
Spain is rated Baa3 by Moody's, which is due to complete a review in September. Rival Standard & Poor's said on Wednesday it was unlikely to cut Spain's rating below investment grade in the near future given the lifeline promised by the ECB's new bond-buying programme.
Green said the bulk of demand at Thursday's auction is likely to be for the shorter-dated bond, which would be eligible for purchase by the ECB if Spain asks for a rescue.
Spain has managed to complete around 80 percent of its medium- and long-term borrowing plan for this year, but faces a refinancing hump of 27.5 billion euros in October.
It has increasingly depended on domestic banks to buy its debt at auctions, however, a reliance that would be reduced if it sought a rescue package.
Spain has already requested 100 billion euros of aid for its banks, crippled when a massive property bubble burst, but Rajoy has said he will not sign up for a full-scale bailout that would impose further tough budget conditions. His government has already committed to austerity measures worth 10 percent of gross domestic product up to the end of 2014 and believes more would lead to a public backlash.
But a fresh spike in yields, more calls for cash from indebted regional governments or problems hitting this year's EU-agreed deficit targets could all push Spain into seeking ECB and European aid despite its hesitancy over the conditions.
ECB Governing Council member Luc Coene warned Rajoy on Monday not to delay triggering the programme, which would involve requesting aid from the euro zone's new ESM bailout fund, and risk another rapid rise in yields.
(Editing by Catherine Evans)
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