Spain's borrowing costs plunge in most recent debt auction, indicating confidence in nation's ability to handle its debt under new leadership; investors demanded 1.74% interest rate, down from 5.1% in Nov. 22 auction

Cindy Allen

MADRID , December 20, 2011 (Associated Press) – Spain's borrowing costs plummeted in a short-term debt auction Tuesday, indicating market confidence in the country's ability to handle its debt is recovering as conservative Mariano Rajoy prepared to take over as the new prime minister.

The Treasury said it sold (EURO)5.6 billion ($7.3 billion), way above the (EURO)4.5 billion it had initially sought.

Investors demanded an interest rate of only 1.74 percent to lend the government 3-month money, down sharply from 5.1 percent in the last such auction on Nov. 22. The rate for the 6-month bills was 2.44 percent, down from 5.22 percent.

Short-term credit conditions have eased significantly in recent weeks, helped by the European Central Bank's offer of ultra-cheap loans to the financial sector as well as the promise by eurozone governments to accept tighter controls on their budgets.

Spain has already made sharp austerity cuts to its national spending to convince bond investors that it will remain solvent despite the turmoil in European financial markets.

Rajoy, who was expected to be voted in as premier later Tuesday after Parliament wrapped up a two-date debate, promised more even austerity this week.

Rajoy's Popular Party won a landslide victory in Nov. 20 elections chiefly on promises to lift Spain out of its economic crisis.

He replaces Jose Luis Rodriguez Zapatero of the Socialist party, which suffered big losses in the election mainly due to its handling of the crisis.

Rajoy will formally be sworn in before King Juan Carlos on Wednesday. He is then to name his ministers and hold a first cabinet meeting Friday.

Opening the debate Monday, Rajoy gave a glimpse of his plans by promising austerity cuts worth (EURO)16.5 billion ($21.6 billion).

Spain's borrowing costs have spiraled over the past year amid fears it might need a bailout like Greece, Ireland and Portugal.

The collapse of a real estate bubble in 2009 ushered in a near two-year recession that has left Spain with an unemployment rate of 21.5 percent _ the highest in the euro-zone _ as well as a swollen deficit and a stalled economy.

Rajoy said Monday he would bring in reforms to encourage companies to hire and tax breaks for small and medium-sized firms that make up the bulk of the economy. He says he will also streamline the government with a hiring freeze for most groups of civil servants.

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