How Spain places its debt: filter for speculators, coordination with Italy and tension for every million in interest

The debt market is once again the epicenter of Spain's economic concerns. Financing costs are rising, after years at record lows, and in the eurozone eyes are turning to the states more over-indebtedas is the case of our country, of Italy, of Portugal, of Greece... The same ones that were the protagonists of the euro crisis since 2010, and whose populations suffered the economic and social consequences of the austerity that followed, in a pack with the 'rescues'.

That is exactly the threat that the risk premiums measure: how much more expensive the debt is for Spain and company compared to Germany, which is considered the best paying partner. However, the situation now is quite different from a decade agodespite the fact that the European Central Bank (ECB) has decided to withdraw most of the monetary support for stop feeding inflation (the mandate of the institution). First, it will end this month bond "net" purchase programsalthough it will continue to reinvest the maturities of those it has accumulated and prepare an 'anti-fragmentation' mechanism, of which the details are unknown and it is feared that it implies conditionality (another way of naming austerity demands). Afterwards, it will begin to raise the reference interest rates from July.

The situation is different because the will of the European institutions has changed and, above all, because the unbeatable financing conditions of recent years mean that interest bills for each year are generally much lower (around 2% compared to 3.7% of 2013, in the case of our country), and that the forecasts do not see them much higher in the medium term. Meanwhile, economic activity continues in full recovery, despite the brakes caused by the war and inflation itself, with Spain leading the growth rates in the EU, as the recovery funds are deployed.

A key actor in this delicate process of hardening the cost of debt is the Public Treasury: the institution in charge of going to the market to issue the bonds with which our country finances public spending that exceeds income (the deficit), to attend to the refinancing of the debt that is coming due and to guarantee that there is always cash in hand to meet the Administration's commitments. A technical but crucial task to control the State's interest bill (see graph).

The Treasury issues Spain's debt on the primary market. The ECB cannot go to these placements by regulation, so where the European institution acts is in the secondary market. In other words, it buys the bonds that our country's financiers (investment funds, banks, insurers, private investors...) have already acquired with certain limitations (proportionality with respect to the rest of the eurozone partners, for example).

Thus, the ECB has guaranteed the demand for Spain's debt for years, even buying the equivalent of the entire deficit of 2020 and 2021 and something else, exercises marked by the extraordinary crisis of the COVID pandemic. Historical support thanks to which the Treasury has managed to reduce the cost of debt to a minimum (see following chart).

With the withdrawal of the European institution from the market, the Treasury redoubles its importance. A role that is most relevant in syndicated placements. These bond issues, apart from ordinary debt auctions, are strategic for Spain, and are syndicated (agreed) to ensure a long term (10 years or more to maturity), the quality of the holders (trying to avoid speculators and volatility) and a significant amount of money in one fell swoop.

One of the main keys to a syndicated broadcast is choosing the best possible time to do it. It is not an easy task. Spain includes in its strategy making at least one at the beginning of the year, another half at the reference maturity, 10 years, and two more at longer terms.

The last one was held on June 7. Why? It was foreseeable that the communication from the European Central Bank (ECB) after its meeting on June 9 would make debt more expensive in the secondary market. And the Public Treasury was right: that day a first increase in official interest rates in the eurozone of 0.25 basis points was announced in July, and the yields of the bonds of Spain, Italy or Germany soared. That of our country exceeded 3% for the first time since 2014 during the past week.

Having chosen a later date for the syndicated broadcast would have meant a much higher cost. On June 7, Spain managed to place 8,000 million euros at 10 years at 2.55%. It was also important not to coincide with the auction that Germany had planned on June 8 to raise a demand of 40,000 million and "of quality", as explained by the Treasury itself, which always defends the advantage of being a "predictable issuer".

The general director of the Spanish Treasury, Pablo de Ramón-Laca, is also president of the subcommittee of the Economic and Financial Committee of the EU in which the times to go on the market are informally negotiated between the issuers that compete for the same money and the same investors, such as Italy, Belgium, Portugal, Spain or even France.

This subcommittee tries to prevent these partners from coinciding in the same week and "removing" funds or investors who may be interested in the debt of one or the other. Although it is not always achieved. In May 2020, faced with urgent financing needs due to the COVID crisis, Italy and Spain issued bonds just one day apart, which drastically reduced demand, even despite the fact that the ECB had announced the purchase program of emergency weeks before.

Another key to a syndicated broadcast are those known as market makers. It is a group of around 20 national and international banks that has privileges and duties regarding the issuance of Spanish debt, regulated by ministerial order. From this group, for each placement the Treasury chooses six entities (in the last one they were Barclays, BBVA, Crédit Agricole, Deutsche Bank, JPMorgan and Morgan Stanley), which are in charge of notifying and contacting investors (investment funds, managers , insurers, individuals...) and who charge commissions for this task. These placement directors rotate to ensure that Spain has access to the largest part of the market. On the other hand, the entire group is committed to offering Spain's bonds on the secondary market at all times.

The Public Treasury may decide to carry out a syndicated issue with the signature of the Secretary of State, a position currently held by Carlos Cuerpo, "although it is an operation that is reviewed by the First Vice President and Minister of Economic Affairs, Nadia Calviño," point out sources from the institution . First, Spain announces the amount of debt and the term on the usual platform, the iis (International Investment Services, for its acronym in English). Information that immediately reaches specialized financial market agencies, such as Bloomberg or Reuters.

Hours later, the Treasury opens "books", where the offers for the debt that Spain has decided to issue are collected, with the reference of how the last bond placed at the same term is listed, plus "a premium" of a few basic points, close to the 10 whole. The Treasury then tries to keep this premium as low as possible without scaring off demand. Reducing a single point can make billions of requests disappear, but also save several million euros in the interest bill that the state faces each year.

When the Treasury already knows all the requests, it also has to carry out two processes: reconciliation and classification. The first has to do with verifying that in the list "everyone is who they say they are," say sources familiar with the debt market. It is common for speculators – known as 'hedge funds', in English, or hedge funds – to hide behind unsuspecting names in search of quick profits by buying and selling bonds – which in financial jargon is called 'trading'.

The states are interested in discovering these 'hedge funds' – here the banks that believe in the market collaborate – because they are considered the worst quality financiers, since if they buy large amounts of Spanish debt in the primary market they could try to sell them almost at moment in the secondary market under short-term strategies, raising the cost of debt and, above all, generating volatility and mistrust.

Thus, the classification aims to avoid these speculators in the placement of the debt package and overweight sovereign wealth funds, with long-term strategies such as Japan or Norway, pension funds or managers and banks with conservative products. Among the latter, there may also be interest in trading, as they are entities that also market aggressive products. Finally, the interest of the placements is closed through a recorded call with contract value.

In a context like the current one, of a general tightening of financing conditions (also of mortgages and all types of loans), it is not only important that Spain start from a cost at historic lows, but also to have achieved an average maturity in maximums.

Spain would have 8 years to renew all its debt, compared to 7 years for Italy and Portugal. Our country has taken advantage of the ECB's support to extend the life of its debt as a whole, which is known as average maturity. This is a clear argument for stability: there is time to refinance the different bonds without having to make great efforts at the worst moment, as happened in 2012, when bonds were issued at more than 5% in the primary market.

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