About a third of the net debt the Spanish Treasury plans to issue this year will be to cover the funding needs of the country’s cash-strapped regions, which have been largely excluded from the wholesale markets.
Of the 71 billion euros in bills, notes and bonds the Treasury plans to sell on top of debt maturing this year, 23 billion is for the Regional Liquidity Fund (FLA), 3.809 billion for Spain’s contribution to the European rescue fund, with the balance of 38.063 billion to cover the estimated deficit of the central government of 3.8 percent of GDP. The shortfall for the whole of the public administrations is targeted at 4.5 percent of GDP:
Of the 71 billion euros, 59 billion will be in medium-to-long term debt and 12 billion in bills.
Including debt maturities, gross issues this year amount to between 215 and 230 billion euros, equivalent to between 13 and 7.9 percent less than last year’s 249.636 billion. Redemptions this year amount to 159.2 billion euros.
The general manager for the Treasury and Financial Policy, Íñigo Fernández de Mesa, said the range for gross debt issues reflects factors such as whether all of the 23 billion euros to be issued for the FLA is drawn down.
As a result of this year’s issue, net outstanding public debt will rise by 10 percent to 760 billion from 688.231 billion in 2012. Last year’s figure in turn was up 16 percent from 2011 as a result of the FLA, an injection of capital in the Bank of Spain’s Orderly Bank Restructuring Fund (FROB), debt drawn on the Social Security Reserve Fund and the bailout from Spain’s European partners to recapitalize the banking system.
Fernández de Mesa said the Treasury met its funding needs comfortably last year, and highlighted a turning point during the summer when foreign investors renewed their interest in acquiring Spanish sovereign debt. Specifically, he said net purchases of debt by foreign investors in the period August-November amounted to 22 billion euros.
The spread between the yield on the benchmark 10-year government bond and the German equivalent was at around 350 basis points in late trade on Tuesday. That compares with a euro-record high last summer of 650 basis points.
He said the Treasury will adopt a flexible approach this year depending on market conditions, with one of the novelties being the issue of nine-month bills and abandoning issues of 18-month paper.
The Treasury will also establish a benchmark two-year issue, with the first auction of such debt to be held on January 10. The maturity date for the issue is March 2015, with the coupon set at 2.75 percent. Thursday’s tender will also include a five-year and a 13-year bond with the maximum issue target set at 5 billion euros.
The average cost of debt last year declined to 3.42 percent from 3.90 percent in 2011, but this was mainly a reflection of the fact the Treasury issued more shorter-dated paper, with the average maturity of the debt sold falling to 6.06 years from 6.5 years.
Fernández de Mesa said current market conditions remain “comfortable” and that no decision has been taken with respect whether to seek assistance from the European Stability Mechanism in order to trigger purchases of sovereign debt in the secondary market by the European Central Bank as part of its so-called Outright Monetary Transaction (OMT) program.
The “anemic growth outlook for 2013 is a big hurdle and makes it likely that Spain may have to request activation of the OMT,” Bloomberg quoted Fadi Zaher, the head of fixed-income sales and trading for Barclays Wealth and Investment Management in London, as saying. “Concerns about debt sustainability won’t vanish overnight.”
The IMF estimates Spain's economy will contract by 1.3 percent next year, almost triple the government’s forecast of a 0.5 percent drop.