March 8, 2021

Before Vote on Budget, Spain Falters in Debt Sale

The Spanish Treasury sold 3.62 billion euros, or $5.2 billion, of five-year bonds in what was seen as the first significant market test for Madrid since the European Central Bank started buying Italian and Spanish debt last month to offset an unsustainable increase in their borrowing costs.

The Spanish bonds were sold at an average yield of 4.49 percent, down from 4.87 percent on July 7, when the government last sold similar bonds. The auction, however, attracted less demand than the sale in July, and the amount fell short of an upper goal of 4 billion euros.

“The auction went through, but the result was, over all, disappointing,” said Chiara Cremonesi, a fixed-income strategist at UniCredit in London.

The prospect of the sovereign debt crisis expanding to two of Europe’s largest economies, after bailouts of three smaller countries, has threatened to sink the bloc’s monetary union after roughly a decade of existence.

The Italian government responded last month by introducing a new package of austerity measures to balance its budget in 2013, one year earlier than planned.

Under pressure from investors, as well as from Germany and France, Prime Minister José Luis Rodríguez Zapatero last week proposed writing a “principle of budget stability” into the Spanish Constitution.

With backing from the main opposition party, the lower house of the Spanish Parliament is expected to approve that reform on Friday, with the upper house expected to follow suit next week.

Both borrowing costs and demand dropped at an auction of 10-year bonds in Italy on Tuesday.

Spain’s fast-track constitutional reform has led to opposition from citizens’ groups, trade unions and smaller political parties. They argue that a referendum should be held before modifying the Constitution, which Spain adopted after returning to democracy in the late 1970s.

Vicenç Navarro, a professor of political sciences at the Pompeu Fabra University in Barcelona, has also argued that rushing reform would weaken democracy in Spain. Mr. Navarro helped start Actuable, a citizens’ platform that has been collecting signatures demanding a referendum.

Responding to such criticism, José Blanco, one of Mr. Zapatero’s senior ministers and the spokesman for his government, told the radio station Ser on Thursday that the government would have liked to “share with citizens” so big a step but had been forced to act speedily given the severity of the crisis and the financial market turmoil.

The two largest unions in Spain are planning a protest march in Madrid on Tuesday, before the Senate vote.

However, the amendment is almost certain to be endorsed by lawmakers. Mr. Zapatero, a Socialist, has already reached agreement with Mariano Rajoy, leader of the center-right Popular Party.

Meanwhile, Portugal, whose bailout in May followed similar rescues for Ireland and Greece, has been struggling to prove its own commitment to tighter budgets. The center-right government on Wednesday presented further tax increases for corporations and wealthy individuals, as well as an extended freeze on hiring and public sector wages, to return Portugal to a balanced budget by 2015.

For this year, the government has pledged to cut the deficit to 5.9 percent of gross domestic product, from 9.1 percent last year. It recently recognized, however, that further measures were needed to offset a fiscal shortfall of as much as 2.5 billion euros so far this year.

Analysts at Barclays Capital described the additional fiscal measures as “a necessary condition” for the government of Prime Minister Pedro Passos Coelho to meet its budget target.

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