Bailout call delay pushes up Spain's borrowing costs

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Bailout call delay pushes up Spain's borrowing costs

Bailout call delay pushes up Spain's borrowing costs
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The amount of interest that the Spanish government is having to offer to borrow money in the short term is again creeping up.

That is because investors believe Madrid should ask for an international bailout sooner rather than later.

The Spanish government is reluctant because such a call would involve further austerity and oversight.

However that is the condition for the European Central Bank helping Spain by putting a safety net under its debt, which is seen as the only way to tame its borrowing costs.

Spain has already asked for some help from the EU to dig its banks out a deep financial black hole.

Domestic banks are the main buyers of Spain’s debt, and that reliance would be reduced if Madrid requested a rescue package.

Yields edge up

At an auction on Tuesday, the average yield on a 3-month treasury bill was 1.203 percent compared with 0.946 percent a month ago, and on a six-month bill it rose to 2.213 percent from 2.026 percent at auction in August.

The Treasury sold 1.4 billion euros of the 3-month bill, and 2.6 billion euros of the 6-month bill, which together were at the top end of its 3 billion to 4 billion euro target.

The Madrid government has said it is in no rush to call for a bailout, which some analysts believe could be delayed until after regional elections in Prime Minister Mariano Rajoy’s homeland Galicia, and the Basque Country on October 21.

But others have said it could come in time for the next full EU Summit, which is due on October 18/19.

Spanish borrowing costs have fallen by around one percentage point over the past month after the European Central Bank unveiled a bond-buying plan aimed at helping to curb soaring financing costs for eurozone periphery countries.

However, an analyst expressed concern over Spain’s delay in calling for a bailout, and warned yields could rise further after a positive ‘ECB effect’ over the past month should ratings agency Moody’s take action against Spain when it likely presents its latest review of the country this week.

“The longer Spain prevaricates on the bailout front, the more this effect is likely to be unwound with a Moody’s downgrade possible this week and a lack of progress at the October 8 Eurogroup (finance ministers) summit set to see this unravelling accelerate,” said Richard McGuire at Rabobank.