February 25, 2021

Borrowing Costs Stubbornly High at Spanish Auction

FRANKFURT — As Spain pulled off a successful — if expensive — bond sale Thursday, a top official of the European Central Bank rejected criticism from Germany that the bank has exceeded its authority by aiding Greece and other beleaguered countries in the euro area.

A day after the leaders of France and Germany promised to support Greece’s continued membership in the currency bloc, the German Chancellor, Angela Merkel, adopted a scolding tone, telling indebted countries to “do their homework.”

Appearing at the Frankfurt Motor Show, Mrs. Merkel said it is “worth every effort” to preserve European unity in the debt crisis, but insisted that troubled countries are still responsible for tackling their own problems, according to The Associated Press.

Speaking in Rome, Lorenzo Bini Smaghi, a member of the E.C.B. executive board, said it would be a mistake to leave countries at the mercy of financial markets, which he said are not functioning properly anyway.

He said criticisms of the bank are “the result of inadequate economic analysis, of insufficient knowledge of the crisis in which we find ourselves and of anxiety resulting from experiences in the distant past that are not relevant to the current situation” — an apparent reference to the hyperinflation of the 1920s, which still influences German attitudes toward price stability.

His comments were thus an implicit riposte to German critics who have accused the E.C.B. of betraying its mandate by buying government bonds of Greece, Italy, Spain and other euro area countries to help control their borrowing costs.

Disagreements about E.C.B. crisis policy broke into the open last week after Jürgen Stark, the only German member of the E.C.B. executive board, last week unexpectedly said he would resign. Mr. Stark was a well-known opponent of the bond purchases, which he saw as improper interference by the E.C.B. in government finances.

On Thursday, Spain raised €3.95 billion, or $5.4 billion, of bonds maturing in 2019 and 2020, just short of its maximum target of €4 billion.

But the yields remained near record highs. The bond due Oct. 31, 2020 was sold at an average yield of 5.16 percent, compared with 5.2 percent when it was last sold on Feb. 17. That was also the level at which it was trading on the secondary market before the auction.

The auction was covered two times, a level of bidding that “compared favorably to the last two Spanish auctions,” said Chiara Cremonesi, a fixed-income strategist at UniCredit. “Taking into consideration the current environment, the auction result was not too bad overall.”

As its borrowing costs have soared, the Spanish government has been struggling to rein in spending to avoid being forced into seeking a bailout, as has happened in Greece, Ireland and neighboring Portugal.

On Friday, the Spanish government is set to re-introduce a wealth tax that it removed in April 2008, shortly after José Luis Rodríguez Zapatero was re-elected as prime minister.

Elena Salgado, the finance minister, on Thursday estimated that the tax could yield about €1.08 billion in additional revenue from about 160,000 of Spain’s richest taxpayers.

In 2007, the last year that the wealth tax was collected, revenue from the wealth tax reached €2.12 billion, after more than 900,000 people were charged between 0.2 and 2.5 percent of their declared assets.

In his speech, Mr. Bini Smaghi lowered expectations that the bank might take more radical steps to contain the sovereign debt crisis. Some economists have said the E.C.B. should effectively print money to prevent deflation and a downward spiral caused by government austerity programs and slower growth in the indebted countries.

In a clear response to Germans who say the bank has gone too far already, however, Mr. Bini Smaghi said that there is no evidence that “any of the interventions implemented have undermined the ability of the E.C.B. to maintain price stability in the euro area in the years to come.”

Mrs. Merkel said that Germany has a “duty and responsibility to make its contribution to securing the euro’s future.” But, in a statement that could reinforce perceptions that political leaders are determined move at their own pace and not be driven by financial markets, she said that stabilizing the euro area “won’t happen overnight or with any one-time thunderbolt.”

She once again rejected proposals for euro bonds, or debt backed jointly by all 17 euro-zone nations.

In Spain, Mr. Zapatero’s government has pledged to lower the budget deficit to 6 percent of gross domestic product this year, from 9.2 percent last year. However, that target was set on the assumption that the economy would grow 1.3 percent this year, but the most recent data suggests that growth will in fact fall short of 1 percent for the full year.

The wealth tax is likely to be the last legislative measure taken by the Socialist government before a general election on Nov. 20. Opinion polls indicate that Mariano Rajoy, leader of the main center-right opposition Popular Party, will defeat the Socialist candidate, Alfredo Pérez Rubalcaba, and replace Mr Zapatero as prime minister.

Even though the revived wealth tax will be more narrowly focused than before, the plan has added to tensions over fiscal strategy between the federal government and regional governments that will be collecting the wealth tax on behalf of Madrid. Economists have also questioned the benefit of such a narrow tax — it will affect about 0.7 percent of Spanish taxpayers — at a time when the euro crisis is deepening.

Some regional government controlled by the Popular Party have already declared their opposition to collecting what they consider to be a misguided wealth tax. Mr Rajoy, however, has refused to say whether he would abolish such a tax if elected in November.

Most regional governments are expected to fall short of their budget deficit targets this year, after only eight of the country’s 17 regional governments met last year’s target. Fitch, the credit rating agency, this week lowered the ratings of five regions, warning that “considerable efforts” were still required “in the area of cost control.”

Raphael Minder reported from Madrid.

Article source: http://feeds.nytimes.com/click.phdo?i=73439f8c411fc1b0d4f26daf60b536b4

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