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Spain sells bonds despite banking woes

Tuesday, October 23 14:23:23

Spain sold more short-term debt than planned today, with demand shored up by expectations the country will ask for aid after ratings for some of its most indebted regions were cut to 'junk'.

The sale came as the Bank of Spain warned the economy would stay in recession in the third quarter and said the country could miss a deficit target agreed with the European Union because of lower tax revenues owing to the slump.

Spain is the focus of the three-year-old euro zone debt crisis after markets pushed its refinancing costs to near unsustainable levels earlier this year on concerns over its high deficit and ailing economy.

Expectations it will soon ask for a financial lifeline that would allow the European Central Bank to buy the country's bonds have helped bring yields down, although markets are increasingly impatient for action.

"We were expecting to see a request made after the regional elections (on Sunday), or in early November, but the risk is that the decision is delayed," said Simon Peck, analyst at RBS, following Tuesday's auction.

Some European officials and analysts say they believe Spanish Prime Minister Mariano Rajoy wants to delay asking for a bailout until after regional elections conclude later in November.

Rajoy's party clinched victory in his home region of Galicia on Sunday, a result seen as overcoming a hurdle on the path to a formal request for help.

Spain's regional governments were largely to blame for the country missing its 2011 deficit target by nearly 30 billion euros, and are at risk of overspending again this year.

All but shut out of international markets and reliant on central government aid to meet debt payments, five regions were downgraded late on Monday by rating agency Moody's, including Andalusia and Extremadura, which were cut to junk grade.

The agency said the downgrade reflected a deterioration in liquidity positions, limited cash reserves and the regions' reliance on short-term credit lines to fund operating needs. It kept negative outlooks on the five regions' ratings, all of which are now below investment-grade.

While an 18-billion-euro credit line from Madrid reduced the immediate risk of a regional default, Moody's said regions would struggle to find a long-term funding solution and to cut their deficits as the economy contracts. (C ) Reuters