Why appearances can be deceptive in Spain

A Spanish flag flutters near the dome of the Bank of Spain in central Madrid Photo: Reuters

Spain is not frozen out of the markets. That is the conclusion to be drawn from today's auction of Government debt - essentially the Government borrowing money from investors.

It managed to raise over the target of two billion euros on the back of healthy demand - the auction was 3.3 times over-subscribed - much better than the last time the Government came to market in April.

So what was the Spanish Budget Minister, Cristobal Montoro, fretting about on Tuesday when he warned the doors to the market were "closed" to Spain? It was alarmingly blunt language from someone at the heart of the crisis.

Looking closer at the sale, perhaps he wasn't far wrong: the yield (interest) charged by investors on the ten year bond this morning was 6.044 per cent, up sharply from 5.743 they were demanding back in April.

Nicolas Spiro, a bond strategist says "these are prohibitive rates which underscore the dramatic deterioration in Spain's perceived creditworthiness. Right now confidence in Spain is at an all-time low."

So Spain can still borrow but at a hefty price. And this was only a small auction; the country has to raise a further €80bn this year as well as €16bn for its semi-autonomous regional governments, which are seen as even riskier.

It's also worth looking at who was buying the debt: largely Spanish banks. In recent months foreign lenders have melted away and it's local institutions which have stepped in to lend the Government money.

Except, isn't it Spanish banks which are in trouble and need a bailout, likely to come from ... the Spanish government?

This circularity is one of the reasons investors are very worried about Spain and why, I expect, yields will continue to rise unless there is decisive, international action.

Cristobal Montoro might have been unguarded in his comments but he wasn't wrong.