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Guest Commentary: Spain Ahead of the Curve, at least in Bond Auctions

Guest Commentary: Spain Ahead of the Curve, at least in Bond Auctions

2012-02-15 08:00:00
Yohay Elam, Forex Crunch,
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The euro-zone’s fourth largest economy, Spain, continues distancing itself from the crisis. Yet another bond auction saw lower yields with a full coverage.

As of the beginning of February, Spain has managed to cover nearly 25% of all funding needs. There are 3 reasons for that.

Bonds for 2015, 2016 and 2017 all got lower yields than previous auctions. The 5 year bonds got a yield of 3.565% and an especially high bid-to-cover ratio. The Spanish Tesoro indicated a range of 3.5 to 4.5 billion euros, and it sold 4.55 billion.

This joins previous successful auctions in 2012. One of them saw Spain raise more than double the initial target. All in all, Spain is getting all the money it can, and for reasonable prices.

Spain enjoys the following benefits:

  1. Debt-to-GDP ratio is OK: Spain’s government debt to GDP is around 80%, much lower than Italy’s 120% and around the figures seen for Germany. France has a higher ratio.
  2. LTRO: The ECB’s huge Long Term Repo Operation created an incentive for banks to buy sovereign debt and pledge it as collateral for cheap money from the ECB. The first operation resulted in around 489 billion euros. The second one, due on February 29th, is already pushing banks to accumulate sovereign bonds and enjoy the arbitrage. A total of 1 trillion euros is expected.
  3. A new government: Mariano Rajoy’s government entered office at the end of December. While it “discovered” a much higher deficit for 2011, it showed willingness to comply with the EU demands. The actual performance is still to be seen, but the current grace period certainly allows Spain to raise a lot of money.

The bottom line result: Benchmark 10 year bonds fell under 5%, the lowest since the end of 2010, when the Irish crisis erupted.

Further reading: European Cliff Hanger – Spain

By Yohay Elam, Forex Crunch

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