Spanish Finance Minister Elena Salgado vowed to press on with today’s bond sale as the nation’s borrowing costs hover close to a record high for the euro era. “Spain has never cancelled an auction, even when markets were very turbulent,” Salgado told reporters in Madrid late yesterday after a meeting with Prime Minister Jose Luis Rodriguez Zapatero. “It is positive to go ahead and show Spain´s capacity to raise funding.” The government plans to sell as much as 3.5 billion euros ($5 billion) of three-year and four-year bonds today. The auction will test Spain’s ability to fund itself while the nation’s 10-year yield approaches the 7 percent mark that heralded the bailouts of Greece, Portugal and Ireland. “We watch with concern the stresses in financial markets and how it affects the debt of the Kingdom of Spain,” Salgado said. “We treat this situation with concern, with responsibility and the confidence that we are doing the work we have to do´´ and “we estimate this situation could last a few days more.´´ The auction will take place at 10:30 a.m. in Madrid. The Treasury may have to pay interest rates on its three-year bond as high as 5.09 percent, which is the yield fetched yesterday on the secondary market. The last time three-year government securities were sold, on July 7, the average yield was 4.291 percent, with bids exceeding offers by 2.29 times. Market Turmoil Spanish 10-year yields have jumped by about 70 basis points to a high of 6.46 percent since a euro zone leaders’ summit on July 21 failed to convince investors the spread of the debt crisis can be halted by a so-called selective default for Greece. Salgado attributed turmoil this month to thin volumes because of the vacation season. “We had anticipated volatility in August as often occurs when trading volumes are low,” said Salgado. Salgado also attributed the situation to the U.S. standoff on the government’s borrowing limit and unresolved concerns after the summit, and said she doesn’t expect borrowing costs to remain so high during the whole month. Commenting on an estimate due for economic growth in the second quarter, Salgado said that it will be “in line” with expansion in Europe. Today’s sale will likely be Spain’s only bond auction this month. The country still needs to sell about 38 billion in bonds be the end of the year and has completed 60 percent of its 2011 financing, less than the euro-area average of 67 percent, according to a report by UniCredit SpA. Spanish Austerity The Spanish government has tried to counter investor concern that rising debt-servicing costs may wipe out the benefits of austerity measures, further hampering efforts to lighten the nations’ debt burden. Should bond buyers spurn Spanish and Italian government bonds, the two countries risk getting sucked into a spiral of higher borrowing costs and subsequent credit-rating downgrades. The Spanish budget deficit, at 9.2 percent in 2010, was below only Greece and Ireland among the countries sharing the euro currency. Moody’s Investors Service put Spain’s Aa2 rating on review for a possible cut on July 29, citing “funding pressures.” Moody’s said the precedent established by the Greek bailout signalled a “clear shift” in risks for bondholders, and that one of the main drivers of its decision was the “increased vulnerability of the Spanish government’s finances to market stress.” Spanish Prime Minister Jose Luis Rodriguez Zapatero interrupted his vacation in the south of Spain yesterday and returned to Madrid to discuss the worsening fiscal crisis with ministers and to brief political parties on the situation. To contact the reporters on this story: Angeline Benoit in Madrid at abenoit4@bloomberg.net; Charles Penty in Madrid at cpenty@bloomberg.net To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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