By John Stonestreet and Nigel Davie MADRID (Reuters) - Spain took in its stride the first test of investor appetite for its debt since a two-notch credit ratings downgrade, selling short-term paper ahead of a far trickier hurdle later this week, when it tries to place longer-dated bonds.

Belgium also smoothly sold short-term paper and sought bids for its first 10-year bond, via syndication, for more than six months - offering a pointer towards sentiment for benchmark debt from countries working to distance themselves from the sharp end of the euro zone crisis.

Spain has been leapfrogged by Italy as markets’ most immediate target in the euro zone debt crisis, but it remains firmly in the firing line and Thursday’s bond auctions will be a test of efforts by its new government to ease budget concerns.

Analysts expect it to pay around 5.5 percent in annual yield to borrow over 10 years, well down from peaks reached last year and a good distance off the 7 percent level that drove Greece and others to seek international aid.

But risks have risen to the sale due to a series of ratings downgrades and the collapse of talks on the private sector element of Greece’s bailout late last week.

“While auguring well as regards Thursday’s Spanish bond sales, a successful outcome for these auctions is not assured,” said Richard McGuire, analyst at Rabobank.

Spain sold a total of 4.88 billion euros of 12- and 18-month bills on Tuesday, close to the top end of its 5 billion target and aided by a flood of cheap three-year money from the European Central Bank that has fed demand for shorter-term euro debt.

Yields were 2.049 percent and 2.399 percent respectively, lower than expected and little more than half of what was paid to place the same maturities in December.

But the Treasury will have to draw demand from a different pool of investors, over much longer durations than the ECB loans, to place 3.5-4.5 billion euros of bonds on Thursday.

“The 10-year auction will provide a proper litmus test for Spanish debt,” said David Schnautz, analyst at Commerzbank.


Always less under the market microscope than Spain, and the more so since a new government took office in Brussels in early December after 1-1/2 years of political stalemate, Belgium saw demand for its syndicated issue top 5 billion euros.

Price guidance suggested it would sell at a yield of around 4.3 percent, Thomson Reuters service IFR said, with final pricing expected later on Tuesday.

The European Commission said last week that Belgium had taken effective measures to bring its deficit under the EU limit of 3 percent of gross domestic product in 2012.

Belgian bill yields at a sale on Tuesday were just 1.162 percent over 12 months, half those a month earlier.

“It’s clear that the ECB’s extraordinary liquidity measures have succeeded in easing the credit crunch that was spreading across Europe and opened an indirect funding channel for peripheral states,” said Nicolas Lopez, senior analyst at M&G Valores.

Schnautz said market sentiment towards Spain had also been boosted by action by the new government elected in November to tackle the budget deficit after a steep overshoot in 2011, and by its plan to raise taxes despite pre-election promises not to.

The 10-year bond traded at 5.13 percent, slightly lower on the day after the bill tender.

Traders said the European Central Bank took action on Monday by buying bonds issued by Italy - the other major euro zone economy at the sharp end of the debt crisis - as well as Spain.

That offset pressure from the salvo of S&P downgrades, though the rising risk of a disorderly default in Greece - which sold 1.625 billion euros of three-month bills on Tuesday - weighed on markets.

Despite worries over the risk of default if Greece does not make progress in talks with private creditors suspended until Wednesday, Athens also sold almost 1.7 billion euros of T-bills, with yields down by 4 basis points to 4.64 percent compared to an auction in December. As with most bill sales, that reflected bidding by domestic banks.

Additional reporting by Manuel Maria Ruiz; editing by Patrick Graham

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