Economy Jul 25, 2012
Madrid: Regional debts, soaring borrowing costs, a higher deficit and souring market sentiment are all making it nearly impossible for Spain to find 50 billion euros in funding it needs by year end without external aid.
Madrid will need 10 billion euros more than expected at the start of the year to fund a softer deficit target agreed with the European Union, and 12 billion extra euros for a new liquidity line to highly indebted autonomous regions.
That raises the total funding requirements for the rest of the year to around 50 billion, squandering the advantage Spain had gained in the first half of the year by "frontloading" its funding at a time when the European Central Bank was giving banks cheap money to buy government debt.
Spanish officials had boasted that the second half of the year would not be difficult after they raised 59 billion worth of their expected 86 billion euro funding requirement in the first half of the year.
But the benefit has evaporated now that the Treasury needs to find extra funding to meet a deficit target revised to 6.3 percent of Gross Domestic Product from 5.3 percent, and provide the new cash for its rescue fund for the regions.
Spain's public finances have been a major concern for international investors since it missed deficit targets for last year by a wide margin. The crippled state of its banks and a second recession in three years, set to last well into next year, have made things worse.
The country's funding costs have reached new euro-era highs. On Tuesday, the 10-year paper was trading at 7.60 percent, well above the 7 percent level seen as unsustainable for public finances.
The Treasury can use the cash it has in its coffers and short-term liquidity to repay 12.87 billion of debt maturing on July 30. A bigger test looms on October 29 and 31, with no less than 20.27 billion euros of debt maturing in two days.
Spain now has a liquidity buffer of 28.9 billion euros in cash. But that has been melting down rapidly in the last two months - from 44 billion euros in April and 40.3 billion euros in May.
July and October are also traditionally good months for the fiscal position of the country as taxes are being collected, but tax collection has been weak since the start of the year, down 5 percent compared to the same period last year.
If Spain cannot sell enough medium or long-term bonds, it can also kick the ball downfield by issuing short-term T-bills. But relying on short-term funding to finance long-term needs hardly removes the problem and comes at a mounting cost.
Spain placed 3 billion euros on Tuesday for which it paid the second highest yield on short-term paper since the birth of the euro.
The Treasury said earlier in the year it planned to issue 100 billion euros in short-term bills by year end, which it said it would use to soften its funding curve. It has so far tapped the short term bill market for 47 billion euros and needs to roll over around 35 billion by the end of the year.
So far, thanks in part to the European Central Bank's cheap money, the sharp increase in yields on Spain's debt in secondary markets has yet to raise its average funding costs, which remain on target and below those of previous years.
The average yield for Spanish debt was 3.27 percent at the end of June, compared to 3.90 percent one year earlier, the Economy Ministry said on Tuesday.
Keeping those costs affordable in future will require that Spain be able to find buyers for new bonds. Foreign buyers have stayed clear of the Spanish bond market for weeks, and persuading Spanish banks to buy their country's bonds has become increasingly difficult.
It will be even more difficult if the sovereign credit rating, currently one step away from junk territory, is downgraded any further.
"There are no international buyers. The small banks have no capacity to buy anymore, the big ones are just rolling over their paper and basically only the state-intervened banks are buying right now," said a senior debt analyst who asked to remain anonymous.
Nevertheless, he said Spain could still manage to fund itself for the year if it receives some kind of liquidity help.
One possible source of support could be the hundreds of billion euros still parked by banks at the ECB after they obtained around 1 trillion euros in cheap loans in December and February. If it was to be freed up, Spain could benefit greatly from it.
Another option would be a rescue line from the permanent European bailout fund in the form of primary or secondary market debt buying. But the European Stability Mechanism will not enter into force until September and, because it is only partly pre-funded, it lacks the firepower to fully shield Spain from markets.
"Until it gets all its capital, this is a one-bullet gun. So my guess is that the euro zone will wait until the last minute before it uses it in Spain, because if you miss the shot, you're dead," the analyst said.