Spain's ailing finances got a needed boost Thursday from the sale of long-dated debt, much of it to foreign buyers, clearing the biggest hurdle for the country since the European Central Bank signaled two weeks ago that it stood ready to buy bonds of fiscally frail euro-zone members.
But economic and political challenges remain for Spain, as well as for Prime Minister Mariano Rajoy, who had to fend off a potentially destabilizing request Thursday from the powerful region of Catalonia for a larger share of national tax revenue.
In a sign that the effects of the ECB's pledge are allowing Spain to continue to access debt markets, the country's treasury sold €4.8 billion ($6.26 billion) of bonds, above its €3.5 billion to €4.5 billion target.
The offer received €8.577 billion in bids. The ECB's pledge to buy bonds with a maturity of up to three years encouraged Spain's treasury to launch a new three-year bond, maturing in October 2015 and carrying a coupon, or scheduled interest payment, of 3.75%.
This bond accounted for the bulk of the funds raised at Thursday's auction, with the rest coming from the sale of an existing 10-year bond.
People close to the transaction said 70% of demand at the auction—the largest Spanish debt sale since March—came from foreign banks, though some of that could have been on behalf of Spanish buyers.
Still, it represents a big increase over previous auctions, in which foreign banks' participation was below 50%, these people say, as concerns over Spain's credit-worthiness and the future of the euro have spurred capital flight.
"All in all, the auction seems to have gone well and another funding challenge has been cleared successfully," said Orlando Green, fixed-income strategist at Crédit Agricole.
Data from before Thursday's auction show Spain had borrowed funds at an average cost of 3.87% so far this month, down from 5.75% on average in July, according to Jean François Robin, strategist at Natixis.
Mr. Robin said ECB President Mario Draghi's June 26 pledge to do whatever is needed to safeguard the euro "has clearly brought about a complete sea change as regards Spain's funding costs."
Spain has completed about 82% of its annual gross fundraising target of €86 billion for 2012, but some investors believe the country could soon need financial support from the European Union as Madrid faces a worsening recession, high borrowing costs and looming debt repayments, including about €30 billion in October.
Spain has requested a euro-zone rescue loan of as much as €100 billion to overhaul its ailing banks, which are still reeling from a 2008 property-market crash.
On Thursday, International Monetary Fund Managing Director Christine Lagarde said a report on Spain's banking sector due this month will show that recapitalization needs are lower than many feared, and close to projections of around €40 billion made by the IMF in June.
"The expectation is that it is going to be much closer to the IMF financial-sector assessment forecast than the €100 billion that was put on the table as a broad cushion for restructuring of the Spanish banking sector," she said in an interview.
Since Spain estimates it would need just a fraction of the EU loan, Spanish authorities are asking EU partners to allow Madrid to use funds left over from its bank bailout to buy Spanish sovereign debt and avoid a request for further assistance, according to a person familiar with the situation.
With some of the €60 billion left from the EU loan available to buy government debt as a backstop, Spain hopes to shore up investor confidence and allow its treasury to continue issuing debt, this person said.
The Spanish proposal may face hurdles. Simon O'Connor, a spokesman for European Economics Commissioner Olli Rehn, said the money for Spain's financial-sector overhaul was made available "for those particular objectives."
Mr. Rajoy has so far deferred making a formal request for further aid. Such a move would be highly unpopular because it would likely entail further austerity measures for hard-pressed Spaniards as Mr. Rajoy's conservative Popular Party faces elections in the Basque country and Galicia, his home region, on Oct. 21.
Mr. Rajoy is also struggling with a towering budget deficit and trying to counter a deepening financial crisis in Spain's ailing and restive regions.
Catalonia, one of the country's wealthiest and most populous regions, is seeking a new financing arrangement under which it would collect its own taxes and transfer a smaller amount than it does currently to the rest of the country.
Last week, throngs of Catalan demonstrators took to the streets of Barcelona to clamor for independence from Spain. Spain's current crisis has exacerbated a long-held sense of economic grievance in Catalonia.
Many residents of the northeastern region, which has its own language and cultural identity, say too much money currently flows from Spain's more prosperous regions to poorer ones.
After meeting with Mr. Rajoy on Thursday, Catalonia's leader Artur Mas said talks "didn't go well," as there is "no room for negotiation" with Spain's central government on a new financing arrangement.
Mr. Mas told reporters that the Catalan government would analyze the options it has left to pursue further fiscal autonomy. Mr. Rajoy, in turn, said Mr. Mas's demands "weren't compatible with Spain's constitution."
The rift between Catalonia and Spain is expected to escalate, and analysts say that the drop in Spain's financing costs may be short-lived, particularly if Moody's Investors Service were to cut Spain's debt rating to below investment grade, making it the first of the three major ratings firms to lower Spain to junk level.
A decision by Moody's is likely by the end of the month. Such a move would further damp demand for Spanish debt.
Despite Thursday's successful auction, the secondary-market yield on its 10-year government bond, a key measure of borrowing costs, rose 0.08 percentage point to 5.814%.
wsj.com
But economic and political challenges remain for Spain, as well as for Prime Minister Mariano Rajoy, who had to fend off a potentially destabilizing request Thursday from the powerful region of Catalonia for a larger share of national tax revenue.
In a sign that the effects of the ECB's pledge are allowing Spain to continue to access debt markets, the country's treasury sold €4.8 billion ($6.26 billion) of bonds, above its €3.5 billion to €4.5 billion target.
The offer received €8.577 billion in bids. The ECB's pledge to buy bonds with a maturity of up to three years encouraged Spain's treasury to launch a new three-year bond, maturing in October 2015 and carrying a coupon, or scheduled interest payment, of 3.75%.
This bond accounted for the bulk of the funds raised at Thursday's auction, with the rest coming from the sale of an existing 10-year bond.
People close to the transaction said 70% of demand at the auction—the largest Spanish debt sale since March—came from foreign banks, though some of that could have been on behalf of Spanish buyers.
Still, it represents a big increase over previous auctions, in which foreign banks' participation was below 50%, these people say, as concerns over Spain's credit-worthiness and the future of the euro have spurred capital flight.
"All in all, the auction seems to have gone well and another funding challenge has been cleared successfully," said Orlando Green, fixed-income strategist at Crédit Agricole.
Data from before Thursday's auction show Spain had borrowed funds at an average cost of 3.87% so far this month, down from 5.75% on average in July, according to Jean François Robin, strategist at Natixis.
Mr. Robin said ECB President Mario Draghi's June 26 pledge to do whatever is needed to safeguard the euro "has clearly brought about a complete sea change as regards Spain's funding costs."
Spain has completed about 82% of its annual gross fundraising target of €86 billion for 2012, but some investors believe the country could soon need financial support from the European Union as Madrid faces a worsening recession, high borrowing costs and looming debt repayments, including about €30 billion in October.
Spain has requested a euro-zone rescue loan of as much as €100 billion to overhaul its ailing banks, which are still reeling from a 2008 property-market crash.
On Thursday, International Monetary Fund Managing Director Christine Lagarde said a report on Spain's banking sector due this month will show that recapitalization needs are lower than many feared, and close to projections of around €40 billion made by the IMF in June.
"The expectation is that it is going to be much closer to the IMF financial-sector assessment forecast than the €100 billion that was put on the table as a broad cushion for restructuring of the Spanish banking sector," she said in an interview.
Since Spain estimates it would need just a fraction of the EU loan, Spanish authorities are asking EU partners to allow Madrid to use funds left over from its bank bailout to buy Spanish sovereign debt and avoid a request for further assistance, according to a person familiar with the situation.
With some of the €60 billion left from the EU loan available to buy government debt as a backstop, Spain hopes to shore up investor confidence and allow its treasury to continue issuing debt, this person said.
The Spanish proposal may face hurdles. Simon O'Connor, a spokesman for European Economics Commissioner Olli Rehn, said the money for Spain's financial-sector overhaul was made available "for those particular objectives."
Mr. Rajoy has so far deferred making a formal request for further aid. Such a move would be highly unpopular because it would likely entail further austerity measures for hard-pressed Spaniards as Mr. Rajoy's conservative Popular Party faces elections in the Basque country and Galicia, his home region, on Oct. 21.
Mr. Rajoy is also struggling with a towering budget deficit and trying to counter a deepening financial crisis in Spain's ailing and restive regions.
Catalonia, one of the country's wealthiest and most populous regions, is seeking a new financing arrangement under which it would collect its own taxes and transfer a smaller amount than it does currently to the rest of the country.
Last week, throngs of Catalan demonstrators took to the streets of Barcelona to clamor for independence from Spain. Spain's current crisis has exacerbated a long-held sense of economic grievance in Catalonia.
Many residents of the northeastern region, which has its own language and cultural identity, say too much money currently flows from Spain's more prosperous regions to poorer ones.
After meeting with Mr. Rajoy on Thursday, Catalonia's leader Artur Mas said talks "didn't go well," as there is "no room for negotiation" with Spain's central government on a new financing arrangement.
Mr. Mas told reporters that the Catalan government would analyze the options it has left to pursue further fiscal autonomy. Mr. Rajoy, in turn, said Mr. Mas's demands "weren't compatible with Spain's constitution."
The rift between Catalonia and Spain is expected to escalate, and analysts say that the drop in Spain's financing costs may be short-lived, particularly if Moody's Investors Service were to cut Spain's debt rating to below investment grade, making it the first of the three major ratings firms to lower Spain to junk level.
A decision by Moody's is likely by the end of the month. Such a move would further damp demand for Spanish debt.
Despite Thursday's successful auction, the secondary-market yield on its 10-year government bond, a key measure of borrowing costs, rose 0.08 percentage point to 5.814%.
wsj.com
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