Spanish Financing Needs for 2013

spain-government-budget

Spain Alone in Lifting 2013 Bond Sales as Aid Looms – Bloomberg.

It is impossible to predict whether or not Spain will request a bailout, because ECB money printing is keeping the country afloat. Banks are participating in a very profitable carry trade courtesy of the European taxpayer.

Eurozone banks are able to borrow funds from the ECB at about 1% by posting collateral, which undergoes a slight haircut. Then, the banks purchase periphery government debt, present the paper to the ECB in exchange for a 1% loan and use the loan proceeds to pay for the transaction. Spanish T-bills pay 1.75% or more depending on the term and are virtually guaranteed by the ECB creating a riskless profit opportunity.

This trade may not endure forever, but it certainly has a year or more left in it. Spain’s fiscal fundamentals have decoupled from its sovereign bond market due to ECB largesse, but its fiscal condition is worsening. Someday, Spain will be shut out of bond markets and forced to default, but not today.

In 2012, Spain’s financial picture looks like this:

  • Deficit at 8% of GDP =  €90bn
  • Maturing Debt of all durations = €98bn
  • Total Financing Needs = €188bn

The deficit includes aid to banks. Spain believes that its deficit will be only 7.4% of GDP, but a group of economists surveyed came up with 8%. Unnamed government sources say 9%. Since someone may have an axe to grind,  we’ll use the economists’ impartial number.

Spain sold €97.10bn in bonds and €72.75bn in bills to finance most of its 2012 deficit. The remaining €18.15bn hole is being filled by drawing down cash reserves, not paying suppliers and accounting tricks.

The ECB better crank up the money machine for 2013, because Spain will require close to 25% more financing in 2013. The Spanish finance ministry is projecting a smaller deficit next year based on miraculous economic growth. While economists believe Spain’s economy will shrink 1.5% next year, the SFM thinks that the economy will actually return to growth in the second half of the year remaining flat for 2013 as a whole.

If the economists are correct, Spain will record another 8% deficit next year not including more bank rescue funds or the additional deficit form 2012. These are Spain’s financing needs for 2013:

  • Deficit at 8% of GDP =  €90bn
  • Maturing Debt of all durations = €128.20bn (€60bn in bonds + €68.20bn in bills)
  • Maturing Regional Debt = €15bn
  • Total Financing Needs = €233.20bn

In 2012, only cheap funding and an implicit debt guarantee by the ECB enabled Spain to sell enough debt to sustain itself. Expect more of the same in 2013. As long as the ECB keeps these programs in place, Spain should be able to sell nearly €20bn a month in bonds and bills.

***Update***

Spain Buries Itself In Unpaid Bills – WSJ.com.

According to this article, Spain’s financing needs for the regions will be €23bn, not €15bn, due to regional arrears to suppliers. Spain will need to finance €241bn next year. Do I hear a cool quarter of a trillion?

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2 thoughts on “Spanish Financing Needs for 2013

  1. So what would happen if Spain or Greece finally defaulted? Lets say they simply could not pay their debts, and there was no more bailout money. Then what?

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