Overseas investment in Spanish debt suffers biggest fall in 16 years

Foreigners’ holdings fell to 36.5 percent of the total last year from just over half

As fears about the euro subsided, the improvement in foreign investor confidence in Spain toward the end of last year was not enough to offset a massive sell-off of government debt capital in the first nine months of 2012.

According to figures released Monday by the Treasury, public debt in the hands of overseas investors at the end of 2012 was down 56.8 billion euros from a year earlier at 224.662 billion, the biggest fall in 16 years.

With the risk premium at record euro-era highs of close to 650 basis points in July there were serious concerns that Spain might have to seek a full bailout from its European partners. However, subsequent remarks by the head of the European Central Bank, Mario Draghi, pledging to do anything in his power to save the euro sparked a rally in the euro-zone peripheral sovereign debt markets.

That was reinforced by the ECB rolling out a program to purchase the bonds of financially distressed euro-zone countries in the secondary market on the prior condition that they seek assistance from the European Stability Mechanism (ESM).

Spain eventually only sought a bailout to help clean up the balance sheets of banks that had come unstuck because of their over-exposure to the flagging real estate sector.

Foreigners’ holdings of debt also fell relative to domestic investors. After accounting for 50.5 percent of outstanding debt at the end of 2011, the percentage of bonds and notes in the hands of overseas investors had declined to 36.5 percent at the end of December, although in August the figure fell to as low as 33 percent. The last time foreigners held less than 36.5 percent at the end of a year was in 2003. The maximum of 57 percent was reached in September 2011.

Banks’ exposure to Spanish government debt also fell at the end of the year to 31 percent of the total at under 200 billion euros after hitting a maximum of 34 percent in August.

After the abatement of the euro crisis, investors are now looking for debt that offers higher yields. The Spanish Treasury last week sold 7 billion euros in 10-year bonds at a yield of 5.403 percent, with 60 percent of the offer taken up by foreign investors. Demand for the issue was a massive 22.7 billion.

The spread between the yield on the Spanish benchmark government bond and the German equivalent was trading Monday afternoon at around 350 basis points.