By Manuel Maria Ruiz
MADRID, Nov 13 (Reuters) - Spain's first visit to debt markets for funds for its aid plan for banks was a success and augurs well for this part of its battle to fend off a deep and extended recession, analysts said on Thursday.
Madrid has turned to bond markets to pay for up to 50 billion euros ($62.45 billion) in bank asset purchases and its first auction on Wednesday generated strong demand and stable spreads.
Strong appetite for government paper, and relatively healthy fiscal accounts, helped Spain's treasury issue 200,000 euros more debt than expected in a special 4.4 billion euro sale to cover bank asset acquisitions. See [ID:nMDT005803].
That compared with a disappointing sale of new 10-year German bunds the same day which met fewer bids than the sum issued. see [ID:nBAE001471]
"The Spanish treasury has no difficulty issuing debt, and for now the spread has not risen from last month's level," said Juan Antonio Cabrera, head of debt at Caja Madrid.
Spain will issue up to the full 50 billion euros in public debt over the next two years to pay for bank asset purchases designed to boost financial sector liquidity and lending.
The extra debt issue is on top of a 51 percent rise in 2009 gross issuances to cover a swelling deficit as Spain enters recession and rolls out a 38 billion euro fiscal stimulus package to limit economic damage.
Spain's deepening economic problems has caused the spread between 10-year Spanish bonds and the benchmark German bund to widen to 60 basis points in October from 8 bps a year earlier.
But debt markets still see limited risk to Spanish public finances due to a debt to GDP level that is around half that of some European countries and public accounts that ran the euro zone's second highest surplus in 2007.
Also in Spain's favour is a financial system which has yet to require government bailouts, owing to limited exposure to toxic assets and high provisions against bad loans.
That was reflected in a yield of 2.7 percent on Spanish two-year debt sold on Wednesday which compared favourably with a rate of 2.71 percent in the secondary market the previous day.
This paper traded in a band of 2.503/687 on Thursday in the secondary market and its spread against comparative German debt remained steady at 25 basis points.
Debt analysts are now watching Spain to see if it can meet its forecasts to hold the public sector deficit at 1.5 percent of GDP in 2008 and 1.9 percent in 2009.
The European Commission expects the budget gap to swell to 3.2 percent of GDP in 2010, breaching a 3 percent EU ceiling.
Spain's treasury will hold more special auctions in December and January to cover the cost of bank asset acquisitions.
(Reporting by Manuel Maria Ruiz; Writing by Andrew Hay; Editing by Paul Day and Patrick Graham)