MADRID (AP) — Spain’s borrowing costs dropped significantly in a heavily oversubscribed auction of euro2.2 billion ($3 billion) in short-term debt Tuesday, a day after the government announced reforms for its ailing savings bank sector.
The Treasury said demand for the 3- and 6-month bills was about five times the amount sold. The average interest rate in the 3-month bill sale was 0.9 percent, down sharply from 1.8 percent in the last such auction Dec. 21. The rate for 6-month bills was 1.8 percent, down from 2.6 percent last month.
Spain announced Monday plans to strengthen its banks by increasing the reserve capital requirement to try to quell fears the country might be Europe’s next to need a bailout. The plan is to be passed by decree next month and will give the saving banks, or cajas, till September to meet the requirements.
Trading on the Madrid index was down 1 percent Tuesday following the announcement with banks being the worst hit.
But the yield on 10-year bonds continued to hover around the 5.2 percent mark, making for a spread — or difference — of around 2 percentage points with the benchmark German equivalent.
Finance Minister Elena Salgado said the saving banks would need euro20 billion ($27 billion) in new capital to meet new reserve requirements of 8 percent for all banks, up from 6 percent.
Speaking Tuesday she said that the average core capital ratio for Spain’s banks at the moment was above 8 percent.
She said a government fund set up to help the savings banks might eventually partially nationalize those entities that cannot meet the new criteria of raising capital on the open market. These banks, or cajas, would have to become proper banks listed on the stock market to qualify for this type of intervention by the fund.
Concerns about Spain’s banking system, particularly the cajas, has hampered the government’s bid to convince investors that economy is on the right track and will not need a bailout like Ireland or Greece.
Spain is battling to emerge from nearly two years of recession following the collapse of its key real estate sector, which coupled with the international financial crisis has left the country with near 20 percent unemployment and a swollen deficit.
The cajas were the most exposed in housing market and have been left with billions in unpaid loans.
Salgado said the aim of the restructuring is to “dissipate any doubt about the solvency of lending entities.”
In an analysts note, Barclays Capital Research said “recognition of the insufficiency of capital buffers in the system is a step in the right direction” but doubted that the weak saving banks will manage to raise the needed funds in the market and that in end some euro46 billion would be need in recapitalization.
Tullia Bucco of Milan-based UniCredit Research also said the government is underestimating the banks’ recapitalization needs.
The reform announcement came as the International Monetary Fund revised downward its growth figure for Spain for 2011 by a tenth of a percentage point to 0.6 percent, which is less than half the government’s prediction.
Speaking Tuesday, Salado said Spain’s deficit-reduction drive was going well and closed 2010 with better than expected numbers.
Preliminary figures for the central government’s deficit for the year came in at 5.1 percent of GDP, compared to 5.9 percent previously forecast, she said. Numbers for regional government spending are not yet available.
The government’s goal for 2010 is for a total Spanish deficit equivalent to or less than 9.3 percent of GDP, then down 6 percent in 2011.