Borrowing Costs Rise for Spain and Portugal

Spain and Portugal on Wednesday managed to raise the targeted amounts in their latest debt auctions, an important test of market confidence amid Lisbon’s negotiations for a financial bailout and Madrid’s attempts to avoid needing one.

Spain sold €3.37 billion, or $4.9 billion of debt, with the average yield on the benchmark 10-year bond rising to 5.47 percent from 5.16 percent last month. The auction met with strong demand and was at the top end of its target. That was an improvement on a Treasury bill auction on Monday, when Spain barely managed to meet its minimum target despite offering higher rates to investors.

Portugal also had to offer higher rates in the sale of €1 billion of short-term Treasury bills, but met its target and drew strong demand. Analysts suggested that the result will encourage the Portuguese Treasury to sell more short-term debt while its bailout talks continue.

The bond auctions came amid worries that the financing difficulties of ailing euro economies are far from resolved — even those of countries already rescued, like Greece. Athens received a €110 billion bailout last year but may still have to restructure its debt because of the unsustainable cost of repaying investors at double-digit interest rates.

The Greek finance minister, George Papaconstantinou, on Wednesday again ruled out such a move, saying it held “huge dangers for Greece, for Greek banks, for households,” Bloomberg News reported. But such statements have failed to persuade investors.

Meanwhile, strong gains in last weekend’s elections in Finland by nationalist politicians, who are skeptical about having to bail out fellow euro members, have raised concerns about completing the €80 billion rescue package requested by Portugal. In the Portuguese auction Wednesday, yields for six-month bills rose to 5.53 percent from 5.12 percent at the last auction on April 6.

“The costs of funding are up sizably as a result of the spillover effects from Greek restructuring talks, and this might reignite contagion fears,” Chiara Cremonesi, a fixed-income strategist at UniCredit, wrote in a note to investors regarding Spain and Portugal. “The good news is that demand was healthy, and this will reassure investors.”

Market sentiment has seesawed in the past months amid diverging signals from European politicians about their willingness to provide further financing to countries that have already requested a rescue and prepare for possible additional bailouts. In particular, any bailout of the Spanish economy, which is bigger than that of Greece, Ireland and Portugal combined, could put the survival of the euro in question.

At its previous auction of 10-year bonds, for instance, the Spanish Treasury managed to lower slightly its borrowing costs after a mid-March agreement by European leaders to strengthen the European Financial Stability Facility available to rescue troubled economies, as well as allow the facility to purchase government debt in some conditions.

Since then, however, the European political landscape has become more fragmented because of the fall of the Portuguese government and the Finnish election result.

Officials from the International Monetary Fund, the European Commission and the European Central Bank arrived in Lisbon last week to start negotiating the terms of a bailout. Their goal is to complete a deal by mid-May, before the general election scheduled for June 5. June is also the month when Portugal faces its toughest refinancing hurdles of the year.