INVESTIGATIVE REPORT: SPANISH FINANCING NEEDS

Spain speeds up 2013 funding, will cover regional needs | Reuters.

I have been following Europe’s ongoing fiscal crisis for several months now and have wrote extensively about the Spanish situation. The numbers do not add up. Today, I read an article in Reuters where the Secretary General of the Spanish Treasury Inigo Fernandez de Mesa said:

As we speak, my funding needs for this year are almost covered, at 95 percent, and my intention is to start funding the Treasury for next year so that we can start the year with our homework done.

My figures do not agree with those being quoted by not just Reuters but by all of the mainstream media outlets. On October 14, the WSJ journal quoted de los Guindos as saying that Spain had completed “almost 90%” of its financing needs for 2012, and on September 6, it quoted him as saying Spain had completed “almost 77%.”

I have been keeping running total of Spanish debt sales, so let’s check their claimed figures using this equation:

Net Debt Sales/% Completed = Implied Total Financing Needs

Think of the equation this way. If I had read 10 chapters of a book and I told you that I was 50% done with it:

10/.5 = 20

As you can see, the book is 20 chapters long based on those pieces of information.

For checking the Spanish Finance Ministry’s claims, we will use the net debt sales that I have compiled from their own website and divide them by the quoted percentage on the given date:

  • ·        On October 25, 2012, Spain had sold €132,677.13, which was quoted as 95% of their claimed financed needs: €132,677.13/.95 = €139,660.13
  • ·        On October 14, 2012, Spain had sold €119,671.13bn, which was quoted as 90% of their claimed financed needs: €119,671.13bn /.90= €132,967.92
  • ·        On September 6, 2012, Spain had sold €102,321.98, which was quoted as 77% of their claimed financed needs: €102,321.98/.77= €132,885.69

The latter two figures are in line with each other, and today’s number is not in the same ballpark (or pitch, for you international readers). This is odd, so it bears a closer look.

Spain’s financing needs are based on two main components. A country needs to issue debt to cover a budget deficit in the present year and to rollover maturing debt. You would think that it would be quite simple to obtain these numbers and determine Spain’s financing needs for 2012, but this is the euro crisis. Nothing is that simple.

Spain predicted a budget deficit of 4.4% in late 2011, which was raised to 5.8% in March. This number was raised again in May to 6.3%, but the cost of the bank bailouts will raise it to 7.4% according to Spain. However, for the first half of the year, the budget deficit was 4.04% for a yearly rate of 8.1% if we round. If you have been following the euro crisis, you should know by now that budget deficits of distressed countries will exceed projections. For that reason, 10% is a reasonable estimate of the what the true budget deficit will be when all is said and done. Put these figures aside for now.

The other component of the financing needs is the amount of debt that needs to be rolled over this year. Since Spain is running a budget deficit, it cannot pay off these obligations and must sell more debt to cover them. Once again, you would think that it would be quite simple to obtain these numbers, but this is the euro crisis.

My research yield several figures in response to the simple question, “How much debt does Spain need to rollover in 2012? I have a low of €70bn and a high of €153.2. Let’s look at all of the scenarios in my Spanish Financing Needs Matrix:

 

4.40%

5.80%

6.30%

7.40%

8.10%

10%

Deficit % of GDP

Debt Rollover 2012

€ 51.92

€ 64.85

€ 70.44

€ 82.73

€ 90.56

€ 111.80

Deficit in Billion

€ 70

€ 121.92

€ 134.85

€ 140.44

€ 152.73

€ 160.56

€ 181.80

€ 80

€ 131.92

€ 144.85

€ 150.44

€ 162.73

€ 170.56

€ 191.80

€ 98

€ 149.92

€ 162.85

€ 168.44

€ 180.73

€ 188.56

€ 209.80

€ 130

€ 181.92

€ 194.85

€ 200.44

€ 212.73

€ 220.56

€ 241.80

€ 153

€ 204.92

€ 217.85

€ 223.44

€ 235.73

€ 243.56

€ 264.80

This is a very simple tool to use. Pick your budget deficit and your debt rollover figure, and the amount at the intersection is the financing requirement for that scenario. For example, a 6.3% budget deficit with a €70 debt rollover gives us financing needs of €140.44 for the year. By the way, it’s certainly a red flag when we need a matrix to organize all of the budget news emanating from your country.

So what are the true financing needs anyway? I don’t know, but they are definitely not the numbers that the finance ministry officials are throwing about. My guess is that the true number lies within the last two highlighted columns on the matrix. If I had to choose, I would stick to my original debt rollover figure from my September 6th article of €98bn with an 8.1% budget deficit giving us a total of €188.56.

Spain has sold €132.7bn in debt that matures next year or beyond. Subtracting this figure from our projected financing needs, (€188.56b -€132.7bn) we obtain €55.86bn. In this scenario, Spain has only completed 74.4% of its financing needs.

Even if we take the most favorable number for maturing debt, Spain would need a budget deficit of 6.3%  to claim that it was close to completing its financing for the year. I think the 8.1% column represents the best case scenarios. However, if we have learned anything from the Greek situation it is that countries in austerity miss their budget deficit targets more than anyone projects; hence, the 10% column is in the game.

Why would Spain lie about these numbers? Because when it gets serious, you have to lie. Spain is in the midst of a bluff. It does not wish to accept a conditional bailout, so it is disseminating false information to show that it does not need one. Fernandez de Mesa even said that Spain would begin selling debt to fulfill its financing needs for 2013. This is a lie meant to cover Spain’s debt sales between now and the end of the year. If Spain has completed its financing needs for 2012, why keep selling paper, right?

Spain is an advantageous position. While it needs a bailout, the eurozone needs it to request a bailout just as much. If it runs into to trouble, there will be a market panic, which no one wants. Hence, Rajoy is playing chicken. His position is that if you need him to request a bailout, it will be on his terms or else there will be a disaster.

The Spanish Finance Ministry keeps issuing shady numbers in order to maintain the illusion that Spain does not have to request a bailout. The irony is that the eurozone players cannot call Spain out on these numbers, because that would lead to the market panic that they are trying to avoid by having Spain request the bailout.

There are several possible endgames. Spain may decide to not to swerve in the game of chicken, but the eurozone will allowing Spain to accept a bailout without troika imposed conditions. They will save political face by claiming that Spain has already done enough to reform its economy. Then again, the eurozone can call Spain’s bluff allowing it to run out of money. At this point, either Spain can request a bailout or default. If the eurozone calls Spain’s bluff, it will be because it does not believe that it will risk default.

Spain may also decide to swerve at the last moment and accept the bailout with conditions imposed by the troika. That means that Spain’s crisis will unfold in a similar fashion to the one in Greece.

Another possibility is that something else happens, like the proverbial black swan, that forces everyone’s hand at an inopportune time. Think a default or exit by another eurozone country, or someone actually calling out Spain on its dodgy math.

Only one thing is for sure. We should know the endgame by the new year.

Advertisements

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s