Spain Alone in Lifting 2013 Bond Sales as Aid Looms
Spain will be alone in asking bond buyers for more cash next year, as five of the euro-region’s six biggest borrowers reduce the amount for sale, according to estimates from Lloyds Banking Group Plc and Morgan Stanley.
Spain sold 97.1 billion euros ($128 billion) of bonds this year, exceeding its funding target without assistance from the European Central Bank’s bond buying program. While Germany, Italy, France, the Netherlands and Belgium are forecast to lower the amount of debt they sell in 2013, Spain probably will raise its issuance to 110 billion euros, said Achilleas Georgolopoulos, a fixed-income strategist at Lloyds in London.
“The funding needs increase pressure on Spain, which could force them to ask for aid,” Georgolopoulos said. “What we’ve been missing in 2012 is a trigger, and issuance could be the trigger point. The figure has an in-built assumption of Spain asking for aid in the first quarter.”
Prime Minister Mariano Rajoy is trying to rein in a budget deficit that was proportionately the same size as Greece’s last year amid concern that his nation will need more money to fund its regions and banks. While Rajoy has postponed a decision on whether to seek a European bailout to bring down borrowing costs, his task is being exacerbated by the second recession since 2009.
The nation will need to sell 111 billion euros of bonds in 2013, Elaine Lin, a strategist at Morgan Stanley in London, wrote in a Dec. 13 note to clients. That compares with the Spanish Treasury’s provisional estimate for gross issuance in 2013 of 90.4 billion euros, according to a Dec. 11 presentation.
While analysts expect Spain to sell more debt next year, Morgan Stanley and Lloyds predict Italy will cut issuance by about 40 billion euros, as the amount of securities it has maturing declines. France will reduce sales by about 9 billion euros and Germany by about 8 billion, the estimates show.
Investors demand a premium of about 77 basis points or 0.77 percentage point, to lend to Spain for 10 years instead of Italy. That compares with a discount of 181 basis points at the start of this year, according to data compiled by Bloomberg.
“At the moment it looks like issuance will be no problem for most of the euro-region countries,” said Werner Fey, a fund manager at Frankfurt Trust Investment GmbH, which oversees 6.5 billion euros of fixed-income assets. “We are expecting tighter spreads because the ECB has backstopped the market and is ready to step in if yields rise.”
The ECB unveiled its Outright Monetary Transactions bond- buying plan, known as the OMT, on Sept. 6, pledging to spend as much money as needed to restore confidence in the bond markets. The program provides support to debt-strapped nations as long as they sign up to economic reforms as part of a bailout from Europe’s rescue fund.
Rajoy reiterated last week that, while he doesn’t rule out seeking funds, he first needs to know what the effect of a rescue would have on the bond market.
“Can you give absolute certainty to this chamber that the risk premium would fall 250 basis points?”, Rajoy told lawmakers Dec. 19. Today he told a press conference 2013 would be “very tough” and did not exclude seeking a bailout.
Spain’s government is aiming for a deficit that equals 7.4 percent of gross domestic product this year, dropping to 6.3 percent when the cost of the bank rescue is excluded. The European Commission estimates a gap of 8 percent, or 1 percentage point less if the bank aid is excluded.
The nation will struggle to meet its 2012 target because of the contracting economy, Deputy Budget Minister Marta Fernandez Curras said Dec. 21. The government predicts the budget deficit will end the year at about 9 percent, El Confidencial reported yesterday, citing people it didn’t name in the government.
Lloyds’ forecast for 2013 bond sales exceeds that of Spain’s because it assumes the nation will miss this year’s deficit target, Georgolopoulos said. His estimate doesn’t include additional funds that may be required for the regions, he said.
The “optimistic” forecast behind Spain’s deficit target will probably swallow the money it has raised this year for 2013, Citigroup Inc. strategists Nishay Patel, Jamie Searle and Mohit Aggarwal wrote in a Dec. 20 note.
Nine of the 17 Spanish states requested support from Spain’s regional rescue fund, known as FLA, this year and will receive 15.6 billion euros in total. The fund will require 23 billion euros next year, the Treasury said Dec. 11.
“Spain needs the markets to be open,” said Ciaran O’Hagan, head of European rates strategy at Societe Generale SA in Paris. “The issuance next year is feasible, but it requires help from the ECB. We don’t think Spain will be able to get it done without ECB assistance.”
Spain is seeking to clean up the nation’s crisis-hit banks, and today Bankia SA (BKIA), the lender that received the biggest Spanish bailout, fell as much as 34 percent after saying it would be ejected from the nation’s main stock index.
Shares in the Valencia, Spain-based lender traded 25 percent lower at 0.41 euros at 12.22 p.m. in Madrid, giving it a market value of 820 million euros. Bankia said in a filing last night that it would leave the IBEX 25 on Jan. 2 after the index committee took “special measures” due to its recapitalization.
Spain’s 10-year yield has dropped more than 200 basis points since ECB President Mario Draghi’s July 26 pledge to do “whatever it takes” to defend the euro. The rate is 5.30 percent, down from a euro-era record of 7.75 percent on July 25.
Investors currently demand a yield premium of about 400 basis points to own 10-year Spanish bonds rather than German bunds. While that’s down from a euro-era high of 650 on July 25, it still exceeds last year’s average of 280.
“If Draghi and the ECB hadn’t done what they did, Spain would not be borrowing with the ease that it has been,” said Luca Jellinek, head of European fixed-income strategy at Credit Agricole Corporate & Investment Bank. “Spain should not have any problems raising cash, the question is at what price.”