Spain pays lower interest rates in debt auction

MADRID — Spain raised (euro) 4.5 billion ($5.9 billion) in short-term debt auctions Tuesday that saw it paying sharply lower interest rates amid speculation that the country will eventually seek aid to manage its finances.

The Treasury said it sold (euro) 3.5 billion in 12-month bills at an average interest rate of 2.84 percent, down from 3.07 percent in the last such auction Aug. 21. It sold (euro) 1.01 million in 18-month bills at a yield of 3.07 percent, down from 3.35 percent.

Demand was more than double the amount offered in the 12-month bills and more than three times for the 18-month bills.

Spain’s borrowing costs have fallen from unsustainable highs in recent months after it said it may apply for international aid — if the conditions are reasonable — and after the European Central Bank said it would buy unlimited amounts of government bonds to help countries like Spain.

The rate for Spain’s benchmark 10-year bonds on the secondary market dropped from over 7.5 percent in July to 5.5 percent last week, signaling a big increase in investor confidence.

But the 10-year rate edged back up toward 6 percent this week as some investors worried about Prime Minister Mariano Rajoy’s perceived procrastination in demanding a bailout.

Spain’s Treasury will test investor confidence again Thursday when it plans to sell up to (euro) 4.5 billion in three- and 10-year bonds.

Four countries using the euro have already sought bailouts since the international financial crisis began — Greece, Ireland, Portugal and Cyprus. But the economy of Spain — the eurozone’s fourth largest — is bigger than those of the four bailed-out countries put together. Bailing it out would seriously test the European Union’s finances.

Meanwhile, the economy continues to hurt businesses and banks.

The central bank reported that Spanish banks now have a whopping (euro) 170 billion in loans that are at risk of not being paid, a record figure that represents 9.86 percent of their total loans. The bank said that the proportion of non-performing loans in July was up from 9.42 percent in June.

Many of Spain’s banks are loaded with soured real estate investments following the collapse of the country’s property market in 2008. The 16 other countries that use the euro last month agreed to provide Spain with up to (euro) 100 billion to help support these banks. Results of a complete stress test of the sector are due to be made known Sept. 28.