Spain’s borrowing costs tumbled in a major bond auction Thursday as Madrid scrambled to decide “within weeks” whether to snatch a eurozone financial lifeline.
The success of the bond auction, held on the opening day of a European Union summit on the eurozone crisis, reflected mounting expectations that Spain is to seek eurozone help, and soon.
But despite the bond market relief, grim new data showed that recession-bound Spain, where one in four workers is jobless, still faces deep-seated financial and economic problems.
Bad loans at Spanish banks soared to record of more than one in 10 loans in August, a Bank of Spain report showed.
The ratio of non-performing loans soared to an unprecedented 10.51 percent of total loans from 9.42 percent the previous months, it said.
Prime Minister Mariano Rajoy’s government has already obtained a eurozone rescue loan of up to 100 billion euros for the banks,although it says it will only need about 40 billion euros of that.
The big question now is when Spain will seek aid to finance the broader economy.
Spain will make a decision one way or the other “within weeks”, a Spanish Economy Ministry official said this week, a timetable that dovetails with other sources in Brussels and elsewhere in Europe.
The latest bond sale was helped, too, by Moody’s Investors Service’s decision Tuesday to leave the Spanish sovereign credit rating untouched, one notch above speculative, or junk-bond, status.
A downgrade to junk-bond status could have prompted a flight by cautious investors, forcing up Spanish borrowing costs and accelerating any request for help.
As it is, Spain’s Treasury took advantage of the improved confidence to raise an above-target 4.61 billion euros ($6.0 billion) in a sale of three-, four- and benchmark 10-year government bonds.
The interest rate on 10-year bonds, the litmus test for market feelings about Spain’s long-term debt, fell to 5.458 percent from 5.666 percent at the last comparable sale on September 20.
For three-year bonds, the rate dropped to 3.227 percent from 3.676 percent at the previous comparable auction September 6 and for four-year bonds it dropped to 3.977 percent from 4.603 percent over the same period.
Demand outstripped supply by more than two-to-one.
Spanish sovereign borrowing costs have eased in past weeks, but only because the European Central Bank has said it is willing to buy an unlimited amount of Spanish government bonds to curb rates.
The ECB will do so, however, only after Spain has applied for a credit line from the eurozone bailout fund and submitted to strict economic conditions and international supervision.
“Hopes were growing that progress on a deal may be made at the EU leaders’ summit in Brussels which begins today,” said Jonathan Loynes, analyst at London-based research group Capital Economics.
Even if Spain seeks only a “precautionary” eurozone credit line without actually borrowing any cash, the ECB would still have to buy Spanish bonds to prevent Spanish borrowing costs from rising again, he said in a report.
