Spain borrowing costs dive, ECB loans seen at work

Larger Smaller Reset MADRID (Dec 20): Short-term financing costs for
euro zone struggler Spain more than halved on Tuesday as banks lapped up
debt at an auction, with much of the purchasing power said to come from
cut-rate money to be lent by the European Central Bank.

The
euro zone's debt dilemma remained on view in Greece, however, where
borrowing costs rose to 4.68 percent for just 3 months. The Greek debt
agency old 1.3 billion euros ($1.7 billion) of the short-term debt.

Demand for the 3- and 6-month Spanish Treasury bills was high, with
more than 18 billion euros offered for 5.6 billion euros sold, above the
targeted amount of 3.5 billion to 4.5 billion euros.

"This is
another impressive auction from Spain and an early Christmas present for
the Treasury," said Nicholas Spiro, managing director of Spiro
Sovereign Strategy in London

"Spain is by no means out of the
woods. The Spanish economy is still flat on its back and Spain is
threatened with yet more credit rating downgrades."

Economists
believe Spain is already in its second recession in three years and the
sluggish economy and high deficit have put it at centre of the euro zone
debt crisis. The main concern is that if itneeds a bailout it would
stretch available funds and political will.

Rating agency Fitch
said last week a comprehensive solution to the euro zone debt crisis is
beyond the region's reach and warned six of its economies, including
Italy and Spain, could be hit with credit downgrades in the near future.

Fiscal prudency by Spain's outgoing Socialists and the promise of
further cuts by the incoming centre-right government has helped ease
jitters and draw a line between it and the euro zone's third largest
economy Italy.

Spain also has some room to manuever, with no
major debt redemptions until April while Italy faces coupon payments of
around 100 billion euros in the first four months of 2012.

ECB BOOST

The ECB will offer euro zone banks loans of up to 3 years on Dec. 21 at
a rate of around 1 percent in an unprecedented move to fend off a
credit crunch that could stall the currency bloc's economy.

Demand for ECB's one-week funds was subdued on Tuesday as banks positioned themselves for its three-year loan operation.

Spanish bond yields have tumbled from euro-era highs since the ECB
announcement with some traders using prospects of a large take-up at the
3-year tender to square short positions before the end of the year.

"What has happened is that some banks hadn't realized quite how strong
the ECB measures were. But there have been European (and Spanish banks)
that were able to read the ECB's message and have operated through carry
trade," said a treasurer at a Spanish bank.

A carry trade is market jargon for borrowing at a lower rate to get returns elsewhere at a higher one.

The ECB tenders are probably only been part of the story, say economists.

On Monday, Spain's Prime Minister elect Mariano Rajoy pledged deep
spending cuts in his first address to the new Parliament after his
People's Party (PP) trounced the Socialists in the November election,
though gave few details.

"There is a certain logic to the
(theory the acquisitions are funded by the ECB tenders). Whether that
explains everything is up for debate. Both bills have seen yields that
are miles lower, and other factors include Rajoy's proposals yesterday
and strong levels of end-of-year demand for high yields," Strategist at
Monument Securities, Marc Ostwald said.

"There are lot of people out there looking to park very short dated money over year end and this is as good as any where."

On Tuesday, the Spanish Treasury sold 3.7 billion euros of 3-month
paper for 1.735 percent, after an average yield of 5.11 percent in
November, at a bid-to-cover ratio of 2.9, up from 2.8.

The
6-month bill sold for an average yield of 2.435 percent, down from 5.227
percent, with 1.92 billion euros sold and demand outstripping supply by
a factor of 4.1, after 4.9 a month earlier.

While average
yields were down from a month earlier, and around 30 basis points lower
than levels seen in the secondary markets before the auction, the
Treasury was still paying more than 150 basis points above pre-crisis
levels on both bills. - Reuters

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