Spain’s interest rates in auctioning off €3 billion bonds in medium-term debt yesterday rose quite sharply, putting the stability of the joint currency in doubt once again.
The Treasury sold €2.96 billion in bonds maturing in 2014, 2017 and 2019. Its target range was €2 billion to €3 billion. Demand was high, but so was the interest rate, a clear signal that investors are still not satisfied with the country’s economic performance and fiscal governance.
The interest rate on the five-year debt rose sharply to 6.46%, from 5.54% at the last such auction on 5 July. This puts the rates perilously close to the unsustainable 7% mark. The Treasury provided no comparable rates for the other maturities.
In the secondary bond market, where issued debt is traded openly, the yield on benchmark Spanish 10-year bonds was even higher at 6.98%, up 0.06 percentage points on the day. In short, Spain is being seen as a long-term risk.
Today, eurozone finance ministers are expected to give final approval for a bailout package of up to €100 billion for Spain’s troubled banks. The banks’ bailout was first announced in June, but it has failed to ease worries about Spain’s public finances.
The auction came as Parliament debated a package of sales tax hikes and civil servant pay cuts that have triggered daily protests. A nationwide wave of rallies was planned for last night and with unemployment rates in rural areas hitting the 60% mark, tensions were bound to rise.
Treasury Minister Cristobal Montoro pulled no punches as he launched the debate. A day after saying “there is no money” to pay civil servant wages because recession and a jobless rate of nearly 25% are sapping tax revenue, he said yesterday that Spain simply cannot go deeper into debt.
“It is time to call a spade a spade, financing public services with more deficit and more debt will doom us,“ he said.
The austerity package proposed by the centre-right government is designed to save €65 billion through 2015. It is clear that Spain is in trouble. The bailout will, no doubt, have the same effect that it always has – a brief respite and a softer approach by investors. But it will come back with a vengeance, just as it did time and time again with Greece and Portugal.
Spain’s biggest issue at present is its staggering and debilitating 25% unemployment rate. Graduates and school leavers cannot find work, no matter how many qualifications they have. This leads them to tap into the welfare state – benefits – which are paid for from people’s taxes. The state cannot impose more taxes and cannot spend more on benefits, so the key here is investment and job creation.
The German parliament was due to vote the bailout through the Bundestag yesterday. It was expected to pass, but with some rebellion and dissent. Interestingly, a BBC commentator yesterday remarked that the German word for debt (schulden) – belongs to the same root as the words for guilt (schuldig) or sin (sünde). This perhaps gives an insight as to why the industrial powerhouse is finding the principle of countries allowing their debt to spiral out of control, so difficult.
Perhaps all eurozone countries need to adopt that approach.