Spanish Austerity Budget No Comfort to Bond Buyers

When the Spanish government revealed its latest budget last month, the general assumption was that Spain was pointed down the right track to revive the country’s economy. After all, €27.3 billion in cuts and new taxes for this year alone represented about 17% of the country’s total budget.

Bond buyers, however, were not consoled. At today’s bond auction, Spain sold €2.59 billion in new debt, including €1.13 billion in 4-year bonds at a yield of 2.89%. That’s much higher than the 2.44% yield at last month’s auction. The yield on 5-year bonds rose to 4.32% and the yield on a composite of 10-year bonds rose to 5.7%.

The yield on Spanish bonds is now 392 basis points higher than that on German bonds.

Investors don’t believe that the country can meet its budget target for 2012. Then of course, when the country misses the targets, the rest of the Eurozone will call for more austerity, making matters even worse. And Spain’s banks, already weak, are then likely to require more support in order to prevent (postpone?) their collapse.

Paul Ausick