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How Spain Plays Its Debt: A Filter for Speculators, Coordination with Italy, and Tensions for Every Million Percent

The debt market has once again become the epicenter of Spain’s economic concerns. Funding costs have risen to historically low levels over the years, and the eurozone is focusing on the most over-indebted countries, as is the case with our country, Italy, Portugal, Greece … the same one that played the euro. The crisis since 2010, in which the population has suffered economic and social consequences, has been severely curtailed, along with “survival programs”.

This is exactly the risk that risk premiums measure: how expensive the debt is for Spain and the company compared to Germany, which is considered the best paying partner. Of course, the situation is quite different now from ten years ago, even though the European Central Bank (ECB) has decided to remove most of its monetary support to boost inflation (institution mandate). First, it will complete its “net” bond-buying programs this month, but will continue to reinvest the accumulated deadlines and prepare an “anti-fragmentation” mechanism, the details of which are unknown and fears that it involves conditionality (another form of the name is strict requirements). It will then start raising interest rates from July.

The situation is different because the will of European institutions has changed and, above all, because the terms of undefeated financing in recent years mean that interest rates are generally much lower for each financial year (about 2% compared to 3.7% in 2013. in the case of our country) and that Forecasts do not see them at a much higher level in the medium term. Meanwhile, economic activity continues in full recovery, despite the war and the brakes caused by inflation itself, with Spain leading the growth rate in the EU as recovery funds are used up.

The main actor in this delicate process of debt relief is the state treasury: an institution responsible for entering the market to issue bonds with which our country finances government expenditures in excess of income (deficit) to attend debt refinancing and guarantee that it is always safe. To fulfill the responsibilities of the administration. A technical but crucial task for controlling the state interest tax (see chart).

The Treasury issues Spanish debt for the first time in the market. The ECB fails to regulate these positions, so where the European institution operates, it is in the secondary market. That is, it buys bonds that have already been purchased by our country’s financiers (investment funds, banks, insurers, private investors …) with certain restrictions (for example, in proportion to the rest of the eurozone partners).

Thus, the ECB has guaranteed Spanish debt demand for years, even buying the equivalent of the entire 2020 and 2021 deficit, and something else, exercises marked by the COVID pandemic emergency. Historical support by which the Treasury managed to reduce the value of debt to a minimum (see chart below).

The exit of the European Institute from the market treasures doubles its importance. The role that is most relevant in syndicated placements. These bond issues, in addition to regular debt auctions, are strategic for Spain and are syndicated (agreed) long-term (with a maturity of 10 years or more), holder quality (attempt to avoid speculators and volatility), and significant amounts in one stroke.

One of the key to syndicated broadcasting is choosing the right time. This is not an easy task. Spain includes in its strategy at least one year at the beginning, the second half at the end of the reporting period, 10 years and two more for a longer period.

Last held on June 7th. Why? It should be noted that the communication of the European Central Bank (ECB) after the June 9 meeting increased the price of debt in the secondary market. And the public treasury was right: in July of that day, official interest rate hikes in the eurozone were announced at 0.25 basis points, and bond yields in Spain, Italy or Germany increased. Our country exceeded 3% for the first time since 2014 last week.

Choosing a subsequent date for syndicated broadcasting meant a much higher cost. On June 7, Spain managed to raise 8000 million euros over 10 years at 2.55%. It was also important not to coincide with the auction, which Germany planned on June 8 for 40,000 million and to increase “quality” demand, as explained by the Treasury itself, which always defends the advantage of a “predictable issuer”.

The Director General of the Spanish Treasury, Pablo de Ramon-Laka, is also the President of the Subcommittee of the European Economic and Financial Committee, where market entry time is informally negotiated between issuers competing for the same money. And the same investors as Italy, Belgium, Portugal, Spain or even France.

This subcommittee seeks to prevent these partners from coinciding in the same week and to “withdraw” funds or investors who may be interested in debt from one or the other. Although this is not always achieved. In May 2020, due to emergency financing due to the COVID crisis, Italy and Spain issued bonds with only one-day intervals, which sharply reduced demand, despite the ECB announcing an emergency procurement program weeks ago.

Another key to syndicated broadcasting is those who are known as market makers. It is a group of about 20 national and international banks that have the privileges and responsibilities of issuing Spanish debt, which is regulated by order of the Minister. From this group, the Treasury selects six entities for each deployment (the latter being Barclays, BBVA, Crédit Agricole, Deutsche Bank, JPMorgan and Morgan Stanley), which are responsible for investors (investment funds, managers, insurers, etc.) … ) And who receive a commission for this task. These deployment directors are rotating to give Spain access to most of the market. On the other hand, the whole group is ready to offer Spanish bonds in the secondary market at any time.

The public treasury may decide to pursue a syndicated issue with the signature of Secretary of State Carlos Cuerpo, currently in office, “although this is an operation being considered by First Vice President and Economy Minister Nadia Calvino. “- According to the sources of the institution. First of all, Spain declares the amount of debt and the term on the usual platform, iis (International Investment Services, its acronym in English). tion that immediately reaches specialized financial market agencies such as Bloomberg or Reuters.

A few hours later the treasury opens the “books”, which collect quotes on the debt, which Spain decided to issue, indicating how the last bond placed in the same period is listed, plus a “premium” from several principals. Points, 10 close to the whole. The treasury then tries to keep this premium as low as possible, without fear of demand. A one-point reduction could eliminate billions in demand, but also save several million euros in interest taxes that the state faces each year.

When the treasury already knows all the requirements, it must also carry out two processes: reconciliation and classification. The first is to check that “everyone on the list is who they say they are,” say debt market sources. It is common for speculators, known as “hedge funds”, in English, or hedge funds – to hide behind unbeaten names in search of quick profits by buying and selling bonds – in financial jargon called “trading”.

States are interested in finding these hedge funds – the banks here that believe in market cooperation – because they are considered the worst quality financiers, because if they buy a large amount of Spanish debt in the first market, they can try to sell it. Almost at the moment with short-term strategies in the secondary market, which increases the value of debt and, above all, leads to instability and distrust.

Thus, the classification is intended to prevent these speculators from placing a debt package and excess sovereign wealth funds through long-term strategies such as Japan or Norway, pension funds or managers and banks with conservative products. The latter may also be of interest to trade, as they are entities that also produce aggressive products. Finally, the interest in the settlement is closed through a recorded call for the value of the contract.

In the current context, in the context of the general tightening of financing conditions (as well as mortgages and all types of loans), it is important not only that Spain start at a historically low cost, but also achieve average repayment. Maximums.

Spain would have 8 years to repay all its debt, compared to 7 years for Italy and Portugal. Our country has benefited from the support of the ECB to extend the full term of its debt, known as the average maturity. This is a clear argument for stability: it is time to refinance various bonds at the worst possible moment without much effort, as happened in 2012, when the first bonds in the market were issued at more than 5%.

Source: El Diario





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