Scott Botterman
PIIGS, Monetary Policy

Spanish Trials

By, 05/10/2012

Since Spanish Prime Minister Mariano Rajoy announced an increase in the nation’s annual budget deficit target in March, Spanish bond yields have climbed along with concerns the country will require a bailout. Spain certainly has its issues, but investors should be certain not to overlook key positives, like the following.

Bond sales have been fairly successful

Spain’s Treasury capitalized on improving sentiment following the announcement of the ECB’s LTRO program by front-loading its 2012 bond auctions. As of the end of April, Spain had addressed 98% of its longer-term bonds maturing this year and more than 53% of its target bond issuance for the year. The Treasury has 15 more bond auctions scheduled in 2012 and needs to raise only an average ~€2.5 billion at each—materially less than auctions held earlier this year. Smaller allotments should give the Treasury room to be more selective about what yields it accepts at auction, limiting exposure to higher yields.

Regional debt brakes in place

One of the primary reasons Spain’s 2011 budget deficit was so high (8.5% of GDP) was regional spending greatly exceeded targets. While regional government overspending remains a concern, the political landscape in Spain has changed quite a bit.

Beginning 2011, the center-left Socialist Party (PSOE) had control of the central government, and the center-right Popular Party (PP) controlled several key regions. When the PSOE party called for regional budgetary cuts, the PP-led regional governments saw very little incentive to comply. Instead, they continued spending, and deficits ballooned—maintaining their popularity with voters and creating the perception the PSOE party’s government was ineffective at controlling spending and handling the crisis. The PP subsequently took power following a landslide victory in November elections.

The new government has since taken steps to ensure their own tactics aren’t used on them. New legislation has been introduced removing leaders from office who significantly miss deficit reduction targets and allowing the central government to intervene in extreme situations if it appears a region will miss targets. While there is some risk regions still miss budgetary targets, the likelihood of extreme misses appears to have been reduced for now.  

ECB actions

While the ECB has stepped back from “extraordinary” actions since February’s three-year LTRO, over the course of the sovereign debt crisis, it’s demonstrated a willingness to step in when yields tick up markedly. Whether buying bonds in the secondary market (Securities Market Programme), providing cheap loans to banks who subsequently buy sovereign debt (three-year LTROs) or using some other mechanism, the ECB has moved repeatedly to support credit market access. As long as the Spanish government continues demonstrating a commitment to reform and austerity (ECB President Mario Draghi recently noted the Spanish government’s good progress), it seems likely the ECB will keep acting as it has been.

Spain’s absolute debt levels remain below European peers’, the new government is focused on competitiveness reforms and Spain’s economy is far more developed than the likes of Greece. While Spain likely struggles economically in the near term, the all-out collapse some anticipate still seems unlikely.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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