Spain resumes this week debt issues , after 15 days without facing the market, with a momentous auction in which the minimum rebound in profitability will reopen speculation about the rescue of the financial sector and the country as a whole.
The Treasury will place on Thursday new tranches of old issues of three-year and five-year bonds and ten-year bonds.
Specifically, it will issue three-year bonds with a coupon of 3.3% and due on October 31, 2014; five-year bonds with a coupon of 4.25% and maturity on October 31, 2016, and ten-year bonds with coupon of 5.85% and maturity in January 2022.
Until now, and despite the fact that in recent auctions the interest that Spain has had to pay has not stopped growing, the market reaction has been excellent , with coverage ratios -proportion between the demand and the amount awarded- that has overcome on four occasions the four times.
However, the pressure on Spain comes from all angles, including some of the most prestigious means of communication in the economic sphere, which put the economic policy of the Government in the pillory and in doubt the support it has for institutions like the European Central Bank (ECB) or the IMF.
Both organizations were forced to deny that they had disallowed the government’s plans on the nationalization of Bankia, the first, and that there was no plan to rescue Spain, the second.
And this weekend the Executive denied German pressure for Spain to resort to the European rescue fund for banking problems, to questions on a note by Der Spiegel according to which the German Minister of Finance, Wolfgang Schäuble, pressed on that sense to the holder of Economy, Luis de Guindos , in a meeting last Wednesday in Berlin.
Risk premium and financing
Among so many conjectures, Spain’s risk premium – which measures the spread between the Spanish ten-year bond and the German bond of the same term – reached maximums this week since the creation of the euro above 547 basis points, and increasingly closer of the levels from which the ransoms of Ireland, Portugal and Greece were inevitable.
The effect it has on the market is that the higher the risk premium, the more it costs Spain to finance itself because it has to offer a higher return to investors to agree to buy Spanish public debt issues.
Although the Government has placed in the possible exit of Greece from the euro zone the origin of almost all the evils, the certain thing is that experts and analysts also point to the situation of Bankia like source of distrust .
The Minister of Economy, Luis de Guindos, acknowledged that such high financing costs ” are not sustainable in the long term , although he attributed the rise in country risk to doubts about the political future in Greece.
The Secretary General of the Treasury, Íñigo Fernández de Mesa, reiterated that Spain is financed without problems , and that the funding for this year is “very advanced” and 58% of the needs for this year have already been covered, while remembering that the average cost of financing in the emissions made in the first quarter of this year was 3%, down from 3.9% in the same period of 2011
The debate on a possible bailout of Spain, openly and openly, has focused on the financial sector rather than the possible exit of Greece from the euro.
The rescue options
A comprehensive report on Spain published this week by Morgan Stanley said that the rescue to Spain “is an option “, with advantages to disadvantages.
Among the former, he stressed that the separation between sovereign risk and financial risk would be clear, and between the latter it referred to the inevitable implementation of harsh fiscal and labor measures.
The analysis department of Banco Sabadell assumes intervention in the financial sector and points out that what remains to be defined is whether the “bank rescue” will be made through Spain (accompanied by loss of sovereignty and with an uncertain effect on the risk premium) or directly to banks in need through the European Stability Mechanism (ESM).
The latter is not possible without changes , because this mechanism can not at the moment lend directly to the banks.
Greece vs Spanish financial sector
Barclays analysts, meanwhile, put both issues -Greece and the Spanish financial sector- at the same level, although they add a nuance.
Although they rule out Greece leaving the single currency in the “near future”, they do not completely dismiss that possibility, which would cause major upsets in the euro area.
With regard to the recapitalization of banks, they introduce Italy into the equation, and ensure that in neither country do politicians finish taking the necessary measures to guarantee the request for aid.
Increase investor concern
On the other hand, the concern for growth in Spain and Italy, as well as the signs of weaker growth in the US and China worry investors and have increased the volatility in the markets and triggered the risk premiums of sovereign debt. , according to the latest quarterly report of the Bank for International Settlements (BIS), published this Sunday.
“The concern about a possible short-term negative impact on the growth of fiscal consolidation in Spain and the slow pace of labor market reforms and other structural reforms in Italy, were reflected in the increase in yields on sovereign bonds ” said the BPI.
“The optimism in the financial markets began to evaporate in the second half of March due to the return of concerns about the growth of the euro zone, especially in Spain and Italy, ” the BIS assures in the report on the situation of financial markets in the last three months.
He added that it was clear that “monetary policy actions alone would not be enough to solve the economic problems of the euro area.” The spreads on the sovereign bonds of Spain and Italy against the German public debt have widened considerably.
The fall of some indicators such as the purchasing managers’ index of the manufacturing sector and business confidence in the euro area also contributed to “a less positive growth picture for France and Germany”, the BPI adds, whose headquarters are located at Swiss city of Basel.
The BPI notes that “investors also withdrew when Standard & Poor’s downgraded to Spain and several of the country’s largest financial institutions on April 26.”
The downgrade of the rating of Spain’s sovereign debt two notes to BBB + was reflected in the auction of bonds worth 2,500 million euros on May 2, with an increase in interest rates of 140 basis points for terms shorts
“Over the past three months, the financial markets shifted their focus from the hope of global economic recovery to concern for Europe, ” according to the BBI.
Investor confidence improved substantially after the three-year refinancing operations of the European Central Bank (ECB). In addition, the hopes of a sustained economic recovery gained strength due to the good news from the United States and the strong growth of the emerging markets.
“However, towards the end of May, optimism gave way to doubts about European economic growth, the financial health of sovereigns and banks in the euro area, the effects of fiscal consolidation on growth and political stability within the region. the euro area, “says the BIS.
All this, together with the signs of a more fragile growth in the US and China worried investors and increased the volatility of international financial markets.
Market movements in May clearly indicated that political events in the euro area added significant uncertainty .
The euro began to depreciate strongly due to the political paralysis after the elections in Greece and the concern for a possible exit from the euro zone and its impact, as well as concern for Spanish banks.