This article repeats a misconception about Spanish bond issuance and remaining financing needs for 2012 that I have seen all over the mainstream media. Please follow the math, so that I may show you that Spain’s financing needs are much greater than is currently being reported.
The author writes, “[Spain] has already achieved 95 per cent of its target bond issuance this year.”(My emphasis)
At the beginning of the year, Spain had forecasted a budget deficit of 4.4.% of GDP (€52bn) with maturing debt for 2012 of €98bn, which gives us €150bn in gross financing needs.
The Spanish treasury has sold €132bn in debt maturing beyond 2012, and Spain also drew down its cash reserves by about €10bn since January. Adding those numbers together we arrive at €142bn which does not have to be financed out of €150bn. Dividing these numbers gives us 94.7%. Spain has indeed completed nearly 95% of its target bond issuance for the year, if you allow the fudge for drawing down cash reserves.
However, the target has moved, because the Finance Ministry now projects the deficit to be 6.3%. If we believe it, then Spain needs to find an additional €18bn between now and year end.
You shouldn’t believe the Spanish Finance Ministry. It subscribes to the Juncker doctrine, which he succinctly states thus, “When it gets serious, you have to lie.”
The budget deficit was running at an annualized rate of 8.1% for the first half of the year and has been magically improving since then while the entire economy craters. I wrote about the phenomenon here:
To see the true state of Spain’s finance, we will assume an 8.1% deficit, even though the true number is undoubtedly worse. This figure yields a €91bn budget deficit. At this number, Spain needs to finance an additional €39bn between now and year end.
Adding €39bn to move the target give us €189bn. €142bn in bond sales and cash draw-downs divided by €189bn in actual financing needs leaves Spain with only 75% of the new target completed. I remind you that over 83% of the year is in the books.
The Spanish Finance Ministry is technically not lying when it claims that it has sold almost 95% of its target for the year. It just never updated the target to reflect a larger than forecasted budget deficit like we just did. The mainstream media is not complicit in a coverup; it is merely negligent in not questioning the numbers.
The fact of the matter is that Spain needs to sell more bonds than it is letting on in 2012.
This is just one trick that has been deployed in an effort to keep Spain afloat. Yesterday, Der Welt and the Wall Street Journal reported that the ECB is ignoring its own collateral rules by accepting Spanish T-Bills without a haircut.
Spain is no longer rated investment grade by the major agencies, so its paper should be discounted 5%. If the ECB discounted the paper appropriately, Spanish banks would need to finance an additional €16.6bn, which they simply do not have.
This fudge by the ECB allows Spain to keep issuing T-Bills, because banks can borrow 100% of the purchase price from the ECB. If the ECB was to begin discounting the paper, the Spanish banks would not be able to finance additional T-Bill purchases, and they are virtually Spain’s only T-Bill customer. If this merry-go-round stopped, Spain would run out of cash in a matter of weeks.
Spain’s fiscal condition and financial system are in much worse shape than is being reported, and, therefore, it is in greater danger of defaulting than people realizes.
Rajoy is holding out as long as possible to obtain better bailout terms, but it is inevitable that he will relent. If I know that Spain has only completed 75% of its financing for the year, then Draghi damn well knows, too. He will not be the one to swerve in this dangerous game of chicken.