In Spain’s Budgetary Bag of Tricks Running Low we wrote that Spain’s day of reckoning was getting closer as it slowly exhausted all of the methods that it is using to remain solvent in the wake of a burst property bubble and banking crisis.
The Spanish government now has one less tool at its disposable in its fight against insolvency. Spain has been issuing more debt than the market organically demands for quite some time. The maintain constant demand levels, it has been using its social security reserve fund, Fondo de Reserva de la Seguridad Social, to sop up excess Spanish debt.
From 2005 to 2012, the fund’s domestic debt holdings have skyrocketed from 20% to 97%. In 2012 alone, it purchased €20bn in domestic debt with €14bn concentrated from August to year end, nearly a €3bn monthly pace. In addition to supporting demand, these purchases also moved the price of the debt up allowing the fund to show a €3bn paper gain to partially offset a €7bn raid to increase pensions.
Now the party’s over. No contributions to the fund have been made since 2009, and less than €2bn remains in investments other than domestic debt. With no new or old money to purchase Spanish debt, the market should become more interesting over the coming months.