Spain kicks off funding quest

REUTERS

A Spanish flag flutters in the wind near a statue of Columbus in Madrid.

Spain will kick off the most challenging 2013 funding programme in the euro zone next Thursday with a debt sale that is raising doubts about Madrid's ability to tackle its crisis without financial help.

The auction will refocus investor attention on Europe after a budget deal in the United States took centre stage at the start of the year, lifting high-yielding assets.

The US deal averted hefty fiscal tightening that could have thrown the world's largest economy into recession. It has created a favourable global market environment so Spain, seen as one of the riskiest sovereigns in the euro zone, should attract strong demand for its debt on Thursday.

However, its choice to start the new year with a new two-year benchmark signals Madrid is taking a prudent stance and is not yet willing to test the market with a longer-dated bond that would be more sensitive to foreign demand.

Two-year bonds are protected by the backstop provided by the European Central Bank which said last year it stood ready to buy short-dated government bonds if a country asks for a bailout from its euro zone partners.

Analysts say that by taking the most cautious route available, Madrid is signaling a lack of confidence in its ability to avoid a bailout.

“The first auction is quite significant ... (The) surprise is the maturity they've chosen, which is a very short one. It raises a few eyebrows, it's not really a signal of confidence,” Commerzbank senior rate strategist Michael Leister said.

“You would have imagined that with the 10-year bond trading at (yields around) 5 percent and the market environment very friendly there would have been good arguments for them to try and come out with a 10-year.”

Spain said on Thursday that it would sell new 2015 bonds and would reopen its 2018 and 2026 lines next week. Taps of old bonds are of less interest to market participants as they usually come in small sizes and answer specific dealer demand.

The last time Spain issued a 10-year benchmark bond was November 2011. The fact that it has only issued short-term debt in size since then is a major worry for investors because it leads to a high-risk situation in which Madrid needs to pay back an ever-increasing amount of debt in a short period of time.

With no 2023 bond on the maturity curve, pressure is increasing on Madrid to issue a new 10-year benchmark. If it were to encounter problems attracting demand for such an issue that could be a signal that Spain could no longer continue funding on the market without help.

“In the 2023 (sector) there's zero Spanish issuance. It's quite striking, so obviously the 2023 is a prime candidate for issuance and the market knows that and it will be interesting what its impact is going to be when it does come,” Societe Generale rate strategist Ciaran O'Hagan.

“That's effectively the billion euro question.”

BUCKING THE TREND

While total euro zone issuance will fall by 6 percent this year due to austerity measures, Spanish bond supply will jump by about a quarter to 106 billion euros, according to late 2012 estimates from eight banks.

The sheer amount of supply may be too much for markets to digest, analysts said.

“(Spain asking for a bailout) is still our base case scenario, but we understand that it will not happen unless we have a spike in spreads,” ING rate strategist Alessandro Giansanti said.

The other euro zone issuers next week are Italy - which like Spain is expected to benefit from the broadly improved appetite for high-yielding assets - and safe havens Germany, Austria and the Netherlands.

This week's sell-off in core euro zone debt has lifted yields to levels attractive enough to ensure sales go smoothly, analysts said. - Reuters