Spain concluded the last sale of bonds for the sovereign rating at risk

Spain completed the sale of bonds at the end of the year with the threat of a credit downgrade, undermining government efforts to convince the nation's investors and lenders can meet your refinancing needs in 2011.

Today's auction of 10 years and 15-year bond rose € 2,400,000,000 ($ 3,200,000,000), lack the ultimate goal of 3 million euros, after an increase in borrowing costs prompted the Treasury to reduce to the usual objective € 4000000000. The yield on the 10-year bond rose five basis points after the auction at 5.56 percent as of 11:46 am in Madrid.

Moody's Investors Service said Monday it would reduce the country's Aa1 rating less than three months after the previous cut. Spain's central government, regional administrations and banks require a whole € 290 000 000 000 of funding next year, leaving the country "susceptible to new episodes of financial stress," the company said.

"Spain had to pay much higher yields for this auction, and that's to be expected, in light of what Moody's did earlier this week," said Philipp Jaeger, an economist bond DZ Bank AG in Frankfurt.

The nation now sell € 1780000000 10-year bonds with an average yield of 5.446 percent, compared to 4615 while percent last of the bonds were issued on 18 November, the Bank of Spain said today in Madrid. It also sold € 618,700,000 of debt of 15 percent in 5953 compared to 4541 percent when the paper was sold last October 21.

Funding Needs

Spain's pre-funding for 2011 and has met the needs of this year, according to Salgado. The budget shows the gross issuance of 192 million euros for the central government next year, although sales of assets announced on December 1 may raise € 14,000,000,000 to help reduce borrowing potential. Although Moody's says the country will meet its deficit targets for 2010 and 2011, the rating company raised the risks posed by the requirement for banks to roll over 90 million euros of debt.

"The sovereign right, in terms of debt dynamics and even the future in terms of the trajectory of the debt, which is the banking system is a problem," said Mohit Kumar, fixed income strategist at Deutsche Bank AG in London.

The extra yield investors demand to hold Spanish 10-year bonds over German bonds rose nine basis points to 251 basis points at midday today in Madrid. That compares with a closing of the euro era high of 283 basis points on November 30. The cost of insuring debt against default Spanish fell 5.6 basis points to 318, according to CMA prices.

Bank Buying

Spanish banks can provide some potential support for future bond auctions, as they have reduced the holdings of public debt since June, so you can leave room to absorb the new issue. The lenders have reduced their holdings of Spanish public debt by 15 percent to € 131 900 000 000 in October € 155 600 000 000 in June, according to the Treasury. Its share of the debt of Spain was reduced to 26 percent in October from 33 percent in June, while non-residents increased their share to 48 percent from 43 percent.

"Reducing exposure of institutions ultimately must be a good thing in terms of participation in future auctions," said Sean Maloney, bond strategist at Nomura Holdings Inc. in London. "Probably a little space left for traditional supporters of these auctions to submit."

Spanish banks have also reduced their reliance on funding from the European Central Bank cut lending to 61.1 billion euros in November, the lowest since January, more than € 130 200 000 000 in July, according to the Bank of Spain. Deputy Finance Minister José Manuel Campa, said yesterday that it expected "problems of market access" for lenders next year, while Spain has not seen any "no appetite" of public debt and not expected to next year will be.

Brussels Summit

The auction comes as European leaders are meeting today in Brussels to discuss the creation of a permanent mechanism to support countries facing funding from 2013 when the temporary mechanism set up in May expires. Amid concerns that the current fund of 750 million can not be big enough if more countries seek aid, Germany is hardening its opposition to the expansion of facilities, shifting more pressure on the ECB and its program of gift vouchers.

Moody's analyst Kathrin Muehlbronner said in an interview yesterday that a rescue plan in Spain is not "probable", but refused to "rule it out." Juan José Toribio, a professor at IESE business school and former head of financial policy in the finance ministry, Spain offers the possibility of needing a bailout from 30 percent to 50 percent if Portugal asks for help.

Moody's threatened to downgrade Spain occurred two weeks after the government announced a series of measures, including partial privatization, cuts in benefits and tax relief for small businesses, aimed at boosting growth and reducing the deficit 50 percent in two years. The Socialist government had lowered public wages and pensions announced a freeze in May, after about Greece, by default.

"What it means is that he does not believe in the package," said Toribio. "This is the date."