Three main features should stand out in any description of the Spanish public debt market: the favourable fiscal and economic environment, the implementation of an effective debt management policy and the achievement of a high level of liquidity in all its segments. These facts explain the recent upgrades by international rating agencies that have enhanced the competitiveness of Spain’s debt in the euro market.
Spain has been positively evaluated by the main rating agencies and by the markets as a result of a dynamic macro-economic performance fuelled by supply-side reforms and soundpublic finances.
Spain has outgrown its European peers with an average real GDP growth of 3.2% in the period 1995-2003. In 2003, Spain’s GDP grew six times more than the eurozone GDP. Structural reforms in the final goods and services markets in a context of low real yields and stable inflation has fostered economic activity and boosted employment.
Sound public finances
In terms of public finance, the general government budget has been balanced in the last four years, showing a surplus in 2003. Regarding the future, the Spanish Stability Programme for the period 2003-2007 forecasts a balanced budget in 2004 and a surplus for the rest of the period.
Fiscal orthodoxy in public finance does not rest solely on maintaining high rates of growth. In 2003 a new Budgetary Stability Law came into force committing all the levels of the public administration to maintaining at least a balanced budget (0% in EAS-95 terms) or to taking immediate steps to correct an eventual deviation from this objective. Therefore, the diminishing debt-to-GDP ratio trend will probably continue in the coming years.
The consequences of this healthy picture on financial markets are straightforward. First, it provides added impetus to the development of the market for private fixed income, a necessary condition to allow businesses to obtain the financing their investments require. Second, it implies lower funding requirements for the Treasury, which allows it to implement a strategy based on regular and predictable auctions for its securities. Finally, it has increased the relative value of government bonds reflected in a narrowing spread against the eurozone countries.
The Treasury’s objective is to cover the budgetary borrowing requirements at the lowest long-term cost. This goal is achieved through the issuance of standard securities under a predictable financial scheme based on regular announcements of the funding programme. In fact, every December the Treasury announces the estimated gross and net issuance figures for each maturity bucket to be raised over the next 12 months.
In 2004, gross issuance will reach e79.8bn and will be broken down into e39.7bn in letras del tesoro, e38.1bn in bonos and obligaciones del estado and, possibly, e2bn in foreign currency.
An important goal of the Treasury is to provide investors with highly liquid securities all along the yield curve. To that end, the issuance scheme is concentrated in five benchmark bonds and bills auctioned with four tenors.
Regarding the short-term securities market (letras del tesoro), the Treasury implemented a reform from 2001 aimed at increasing its liquidity and at improving its international distribution. To that end, three and six-month letras were introduced and bills started to be traded in electronic platforms. Moreover, a group of primary dealers specifically appointed for these type of securities was created. Eleven domestic and international banks joined this project.
Short-term debt auctions
On the third Wednesday of each month the Treasury auctions letras with 18, 12, six and three months to maturity. The outstanding amount of these bills will reach from e4bn to e5bn before its redemption.
Five benchmark bonds are issued regularly according to an annual calendar; three and five-year bonos are auctioned on the first Thursday of each month and 10, 15 and 30-year obligaciones on the third Thursday. Ten days before the beginning of each quarter the Treasury announces the specific bonds to be auctioned.
Bonds are tapped regularly until they reach an outstanding amount of e10bn to e12bn and in order to ensure benchmarks achieve a high degree of liquidity since their launch, the Treasury uses “jumbo auctions” for the first tranches of new bonds, in which e3bn to e4bn are issued. Alternatively, syndications are also used to launch longer tenor bonds.
In 2003 the new 10-year obligación (4.20% maturing in 2013) was syndicated. Five book runners led the transaction and allowed the Treasury to issue e5bn ensuring the liquidity of this new bond and at the same time, achieving a wide distribution of high quality investors. Syndicated or auctioned, new benchmarks are quoted and traded on domestic and international electronic platforms from their launch.
Liquidity is a key variable for investors in public debt. The Spanish market has gradually improved its liquidity as shown by the turnover figures achieved in the secondary markets. In the last 10 years Spanish public debt turnover has maintained an upward trend, as can be seen in chart 1. In 2003 the average daily traded volume reached e85bn and in January 2004 more than e91bn was traded.
There are several factors that have underpinned turnover. First, the role played by primary dealers; second, the introduction of Spanish debt in electronic platforms; third the execution of a debt buy-back programme and finally, the existence of a very liquid repo market that helps market participants cover their short positions and to fund their strategies.
There are 20 primary dealers for bonds and strips and 11 for letras. They are committed to quote a large number of references with tight bid-offer spreads and to assume the compromise of promoting the distribution of the Spanish debt. In exchange they have some rights such as exclusive access to second rounds held after the auctions or the right to strip Spanish bonds. As a result of their activity, the bid-offer spreads of Spanish benchmark bonds stand at 2bp for three, five and10-year securities.
Electronic trading
Regarding electronic trading, the existence of local (Senaf and MTS Spain) and international (EuroMTS and Brokertec) electronic platforms which operate with Spanish bonds, letras and repo operations, has boosted liquidity and it has provided market participants with transparent and reliable reference prices.
As part of the debt management policy, the Treasury has executed various debt exchange and buy-back programmes since 1997. They were aimed at smoothing the redemption profile and at increasing the liquidity of the market by buying back less liquid and non-strippable references. The total amount redeemed through buy-backs since 1997 is well above e48bn.
The repo market has shown a continued upward trend during the last few years. Average daily turnover in Spanish repos has grown steadily from less than e10bn in 1999 to more than e25bn in 2003, most of it concentrated in buy-sell back operations.
The outstanding fiscal and economic developments together with a transparent and demand-oriented issuance policy and a liquid secondary market has led to a gradual reduction of the yield spread between Spain and the core euro countries public debt. Financial markets have prized investors in Spanish debt.
Looking into the future, the effect of the reforms so far implemented and the long-term commitments of the Spanish Treasury will ensure the out performance of Spanish letras, bonos and obligaciones.
This article was contributed by Tesoro Publico
