Looking for a substitute for the ECB: Spain has to find someone to buy 100,000 million of debt

The European Central Bank (ECB) will end "net" debt purchases of eurozone states from July. Immediately after, will raise official interest rates after 8 years at 0%. And although the institution will continue to reinvest the maturities of the bonds it already has, the rest of the market, that is, funds, banks, insurers or private investors, should absorb a deficit of 100,000 million (the need for financing due to the difference between public spending and income) and refinancing of Spain that are 'orphaned' —250,000 million in the case of Italy—, from April to the end of the year.

If the new "mechanism" that the ECB itself is preparing behind closed doors does not remedy it, our country and also the rest – especially the peripheral partners, the most over-indebted – need buyers to replace the 'irreplaceable' institution. Since 2015, it has been the main player in the secondary debt market. This is where it makes purchases, allowing unbeatable financing conditions –low interest rates– by guaranteeing demand for those who lend money to countries in the primary market –bond placements and auctions–. And, therefore, favoring greater dynamism in economic activity.

The Oxford Economics analysis center calculates that the institution that directs monetary policy accumulates total debt on its balance sheet for a third of the eurozone's GDP, at the end of the first quarter of 2022. "Which makes the ECB the largest holder individual public debt across the eurozone [por ejemplo, en 2020 y 2021 adquirió todo el déficit de España]", it affects.

The expectation of a reduction in the 'artificial' demand from the ECB and the announcement of an increase in the 'price' of the reference money for stop feeding inflation with 'cheap' loans In recent weeks, the interest demanded on the bonds — those with a 10-year maturity are taken as a reference — of Spain in the secondary market has skyrocketed. That of our country exceeded 3% on Tuesday for the first time since 2014, that of Italy has gone from 1.17% to around 4% so far in 2022; and that of Portugal also beat 3%. All this has set off alarms at times about risk premiums –the spreads of these interests with respect to Germany, which is considered the best paying state, the most 'safe', which is close to 1.5%–. It's simple: less demand is expected, and those who lend the money ask for higher interest, in exchange for more risk, less liquidity...

The ECB thus faces a very delicate situation. By making debt more expensive and stopping injecting money, the line that separates the central bank's ability to contain inflation or end up suffocating the most indebted economies, like Spain, Italy or Portugal —and the most vulnerable families and companies—, is very fine. The institution even called an emergency meeting this Wednesday to calm things down. After her, he announced that he is working on the aforementioned mechanism so that the risk premiums of these peripheral countries do not skyrocket. Or what is the same, so that the debt bill does not become much more expensive than the more fiscally disciplined states.

"The ECB faces the dilemma of raising interest rates and cooling domestic demand at a time when the tightening of bottlenecks [en el comercio mundial] and, above all, the consequences of the war in Ukraine are already taking their toll on activity in the eurozone", explain Eduard Llorens i Jimeno and Rita Sánchez Soliva, economists at Caixabank Research.

The final risk is to end up provoking a crisis like the one in 2010 and 2012, when the euro trembled and the financial bailouts condemned these peripheral countries of the European Union to years of counterproductive austerity, with the interest rate on our country's bond exceeding 7%.

On this occasion, what were then called PIIGS (the pigs Portugal, Ireland, Italy, Greece and Spain, for its acronym in English) are even more over-indebted than then —especially due to the public spending needs that the coronavirus pandemic has demanded. COVID—. However, the unbeatable financing conditions of recent years mean that the annual interest bill is much lower (close to 2% compared to 3.5% in 2013, in the case of our country), and that the forecasts do not see it much higher in the medium term.

Spain paid 26,805 million euros in interest in 2021, 2.15% of GDP. And in 2020 the bill was 25,237 million, a minimum since 2010. In 2013, after the bank bailout the previous summer, spending on debt interest was close to 37,000 million, 3.7% of GDP.

"Ad [el miércoles] of the 'anti-fragmentation' tool had a positive effect, but it is not clear how long this will last without a concrete outline of how it would work and if the ECB will commit to implementing it (as with most things, there are clearly disagreements about the Council of Governance of the institution)," reflects Daniel Kral, an economist at Oxford Economics.

This 'anti-fragmentation' mechanism has the difficulty of circumventing the legal and political restrictions of the eurozone, which prevent the ECB from concentrating its policies on Italy, Spain, Portugal or Greece, even though they are the countries with the most imbalances in the eurozone. The First Vice President and Minister of Economic Affairs and Digital Transformation, Nadia Calviño, has already celebrated that the ECB has guaranteed the adoption of "effective measures" so that "fragmentation within the euro public debt market" does not occur.

Calviño stressed, on Wednesday, that the priority of the European monetary institution must be "to preserve financial stability and the integrity of the public debt markets", a decision that he considers more necessary in "a context of uncertainty and volatility generated by the attack From Russia". In reality, the main mandate of the institution is price stability.

In this regard, Yolanda Díaz, Second Vice President and Minister of Labor, questioned —also this Wednesday at the conference 'Two crises, two governments, two responses' organized by Economists Against the Crisis— that the first mission of the ECB is inflation. “This will have to be reviewed, the priority of the Fed [el banco central de Estados Unidos] is full employment, why not in Europe?” he asked.

"A loss of confidence in vulnerable states could lead to a sharp increase in their financing costs, precipitating severe fiscal tightening needs." [reducción del gasto y del déficit] and, in extreme cases, external adjustment programs [rescates]like a decade ago", warns Daniel Kral, who explains that, "in the coming years, the ECB will continue to reinvest the income due from the stock of debt it holds: in 2022 alone, these reinvestments will account for around 450,000 million euros, of of which around 90% will be invested in government bonds, however this will be dwarfed by the scale of government financing needs, which are almost €2.2 trillion (€1.5 trillion in debt refinancing and 650,000 million euros in new issues).

"Through the reinvestment program, the ECB has some power to soften the financing needs, although they represent only a fraction of the gross financing needs of the governments of the eurozone in the coming years", continues the Oxford Economics expert, who adds that, "for example, Italy's gross debt issuance of €400 billion from the second to the fourth quarter of 2022 is roughly equivalent to the full scope of reinvestments for the entire eurozone."

On Thursday, the ECB's own vice president, Luis de Guindos, said that the markets should have no doubts about the institution's determination to deal with the fragmentation of the financing costs of the eurozone's sovereign debt.

"So far, there are no details about the new tool, which will probably have to be agreed by the Governing Council. And it is likely that the Governing Council will remain divided on the desirability and necessity of a new stabilization mechanism. The only information available is that the The ECB will apply a lot of flexibility in reinvesting the reimbursements of the programs that expire this month. This does not address the problem of fragmentation effectively enough, "concludes Gergely Majoros, member of the investment committee of the manager Carmignac.

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