By: Dr. Mike Campbell
With unemployment at the highest level within the European Union at almost 24% and approximately half of the young workforce (under 25) idle, Spain has big problems. The nation’s exemplary record for meeting EU deficit and debt requirements was turned on its head by the global financial crisis and the spectacular bursting of a property bubble. These events have caused widespread concern that Spain may be unable to meet its financial obligations in servicing its sovereign debt without an EU/IMF bailout which would reignite the smouldering embers of the EU sovereign debt crisis. Spain has been at pains to point out that it can manage its obligations without external assistance (where have we heard that before…?) and has recently announced further ambitious austerity measures which are designed to save €27 billion this year.
Today, (Thursday) Spain went to the markets in a bid to raise €2.54 billion through bond issues. Analysts were watching the auction keenly since the secondary market for Spanish 10-year bonds had seen yields creep above the 6% level, sparking fears about a further round of sovereign debt jitters. In the event, the Spanish 10-year bonds were oversubscribed by a factor of almost two. Whilst the yield on these vehicles did climb from 5.403% (in February) to 5.743%, they remained below the secondary market value and were in heavy demand. Indeed the yields on two-year bonds actually fell from 3.495% (October) to 3.463% signifying greater investor confidence in Spain’s ability to meet its obligations.
The sale has probably helped the value of the Euro which saw a modest gain against both the US Dollar and the Yen; although it lost further ground against Sterling.