Huffpost UK uk

FTSE 100 Index Up 0.8% After Spanish Debt Auction

Posted: Updated:

Spain survived a key test of confidence at a closely-watched debt auction today but concerns remained over the health of the country's finances.

The Spanish government issued 2.5 billion euros (£2 billion) of two and 10-year bonds at the top end of its targeted demand - showing that investors are yet to turn their backs on the country.

But the interest rate, or yield, on the 10-year bond was 5.7%, up from 5.3% at the last auction, reflecting increasing concerns over whether the new government can push through austerity measures at a time of high private debt and soaring unemployment.

Yusuf Heusen, IG Index sales trader, said: "The actual event was something of a damp squib, since both optimists and pessimists can find something to bolster their case."

The FTSE 100 Index was 0.8% or 43 points higher at 5772 after the auction.

Mariano Rajoy, Spain's new conservative prime minister, last month said his country would not be able to cut its deficit to 4.4% of GDP as previously hoped and would post a deficit of 5.8%, which under pressure from European partners he revised to 5.3%.

The warning triggered the current sell-off and Spain has since become the focal point for the eurozone crisis, with the yield on 10-year bonds earlier this week passing 6%, towards levels that forced Greece, Ireland and Portugal into seeking a bailout.

However, it will cost the 16 other countries that use the euro much more to rescue Spain as its economy is nearly twice the size of the three bailed-out countries.

Mr Heusen added: "Regardless of today's sale, Spain remains the country to watch, given its size and the steady deterioration in both its banking system and economic situation."

Spain's economic woes can be traced back to the late 90s when the country joined the euro and its banks, property developers and ordinary home-buyers took advantage of low interest rates and effectively fuelled a huge property bubble.

Property prices soared - nearly tripled - until the financial crisis hit in 2007 and the bubble burst.

The construction industry collapsed, leaving hundreds of thousands out of work, while struggling households face financial difficulties and banks hit by mounting mortgage debts.

The government now finds itself borrowing and spending at record levels to keep the economy in check - which is increasingly challenging as the jobless rate has hit 24%, meaning less income tax receipts and higher welfare bills.

The signs all point towards Spain having to seek a bailout from the EU - but its new conservative government insists this will not happen nor does it need to happen.