Spain paid lower interest rates in its latest short-term debt auction amid speculation that nation will agree to a bailout to ease its debt load

Cindy Allen

MADRIDc , August 21, 2012 (Associated Press) – Spain paid sharply lower interest rates to raise €4.51 billion ($5.54 billion) in a short-term debt auction Tuesday as speculation grows that the country will agree to take a bailout to help it manage is finances.

The Treasury said it sold €3.5 billion in 12-month bills at an average interest rate of 3.07 percent compared with 3.92 percent in the last such auction July 17. It sold €981 million in 18-month bills at a yield of 3.33 percent, down from 4.24 percent.

Demand was almost double the amount offered in the 12-month bills and four times for the 18-month bills.

Spain's borrowing costs have fallen from unsustainable highs earlier this month after the country said it might seek international aid if the conditions are reasonable.

Investors had been demanding rates of up to and over 7 percent to lend the country 10-year money, a display of distrust of Spain's ability to manage its debt and deficit without outside help.

The yield for 10-year bonds on the secondary market was down 0.11 percentage points at 6.15 percent on Thursday. The Treasury will next test investor sentiment on Aug. 28, when it auctions three- and six-month bills.

Greece, Ireland, Portugal and Cyprus have already had their economies bailed out but a full-blown sovereign rescue package for Spain, the eurozone's fourth largest economy, could rock the EU's financial system. The speculation is therefore that Spain will seek a partial rescue.

Conservative Prime Minister Mariano Rajoy is pressing the European Central Bank to intervene in the secondary market to buy up its bonds, which would bring down their interest rates. The ECB has intimated it will help Spain's but only after it formally applies for bailout, implying there will be strings attached.

Spain also wants the European Union to allow those of its banks worst stung by the collapse of the country's real estate sector to be able to get funds directly from the ECB and for these loans not to form part of the country's sovereign debt burden.

Spain has been granted a loan of up to €100 billion from its eurozone partners to help its troubled banks but it has yet to tap the fund.

On Friday, Rajoy's government is to approve a new law creating a "bad bank" that will pool much of the sector's soured investments, estimated to total some €200 billion. The results of a comprehensive audit of all Spanish banks are expected next month.

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