* Investors snap up 31-year term debt at latest sale
* Confidence in Spain after euro zone crisis
* Bond sale three times oversubscribed
* Economic prospects limited and unemployment still high
By Fiona Ortiz
MADRID, Oct 9 (Reuters) - Spain's gradual recovery fromyears of financial crisis received a vote of confidence onWednesday from investors who bought heavily into a new 31-yeargovernment bond despite limited prospects for economic growthand stubbornly high unemployment.
The sale marked a major improvement from a year ago whenSpain was at the centre of the euro zone debt crisis, paying asmuch as 7 percent to sell 10-year debt at auctions that dependedon buying by big Spanish banks and the state pension fund.
Centre-right Prime Minister Mariano Rajoy can also takecomfort from improving opinion polls and a more stable politicaloutlook than in fellow euro zone strugglers Italy and Portugal.
Wednesday's was Spain's first new long bond since 2009, andthe Treasury received 10 billion euros ($13.6 billion) inoffers, more than three times what it had planned to sell, halffrom foreign investors. Spain will pay around 5.2 percent toholders of the debt.
"In July we were paying this price for half the duration.This says the market continues to have a constant appetite forSpanish paper ... These yields are comparable with what we wereissuing, six, eight, 10 years ago," said a source at Spain'sTreasury, who asked not to be named.
With a backstop from the European Central Bank in place incase euro zone jitters return, liquidity from Japan and theUnited States flooding the markets and most of Europe's economystarting to pick up, Spain's financial situation has easedsignificantly.
The economy is also picking up, but slowly and unevenly.
In the July-September period gross domestic product willexpand for the first time in more than two years, albeitslightly, and the International Monetary Fund just improved itsoutlook for 2013, though still sees a 1.3 percent contraction.
It sees growth next year at a tepid 0.2 percent.
So far, the sole economic driver is exports, which includesrecord foreign tourists this year, while retail sales fell for a38th month in a row in August and bankruptcy filings jumped 27percent in the first seven months of the year.
On the debt front, Spain has almost completed its 2013funding needs and last week prepaid 12 billion euros in anexpensive syndicated loan from banks. Andinvestors now want the Treasury to consider issuing arecord-long 50-year bond.
Rajoy, who slashed spending last year to try to bring thepublic deficit under control, travelled to Japan last week todrum up investment, touting an increase in competitiveness afterhe loosened labour market rules.
Rajoy can also cite an expensive but successful cleanup ofSpain's troubled banks after 40 billion euros in Europe-backedfunds were pumped into lenders that got over their heads inloans to builders. Unfortunately the bail-out has also forced upSpain's once admirably low debt-to-GDP ratio to over 90 percent.
He is taking steps to make the state pension system moresustainable - 16 million workers support 9 million pensionersand 6 million unemployed - by delinking pensions from inflation.
But unemployment remains high at 26 percent and is seenbarely falling next year. Even more worryingly, long termunemployment - those out of work for more than a year - hasrisen steadily to close to half of all jobless.
Economists fear that many of those people will never returnto work and will become a permanent drag on domestic consumptionand the state welfare system.
"What recovery are you talking about if the numbers showthere are more unemployed. The only thing you've recovered isinequality," Socialist opposition leader Alfredo Perez Rubalcabasaid recently in a parliamentary debate.
STABILITY IS EVERYTHING
On the political front, compared with perpetual upheaval inItaly and a near collapse of the Portuguese government next doorin July, Spain's ruling PP can boast greater stability althoughthe country inevitably faces some challenges.
The biggest political disruptions are coming from Catalonia,where a growing independence movement may force Rajoy tonegotiate more tax autonomy for the wealthy northeastern region.
The Catalan secession drive, as well as a looming handoverfrom ailing King Juan Carlos to his popular son, Prince Felipe,could fuel demands for constitutional reform in Spain in thenest few years.
For the moment, Rajoy has shrugged off a major corruptionscandal that earlier this year threatened to divide his ownparty, and has bounced back in opinion polls despite unpopularspending cuts on hospitals and schools.
The latest survey by Metroscopia polling firm showed thatthe PP had 34.1 percent voter support, up from 30.5 a monthearlier.
On the right wing of the ruling party, critics say Rajoy issquandering an opportunity to use his absolute majority inparliament to pass more free-market reforms, such as trimmingbureaucracy and cutting income tax.
Meanwhile, Rajoy appears content to bank on an incipienteconomic recovery next year to allow him to reduce some taxes inearly 2015 in order to lure back the voters he needs to give himfour more years in office.
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