EXCLUSIVE: Spanish Treasury’s General Director: By Summer We’ll Reduce Funding Programme

11 May 2021

- ‘In Case of Emergency Cash Needs, There Are Always T-bills’
- Success Best Measured ‘Not by the Size of the Book’

By David Barwick – Frankfurt (Econostream) – Spain’s sovereign debt issuer expects a downward revision by this summer of its funding plans for the current year, according to Pablo de Ramón-Laca Clausen, General Director of the Tesoro and Financial Policy.

In an interview with Econostream on Friday, de Ramón-Laca said that last year was characterised by very elevated uncertainty resulting in expectations of high issuance needs that ultimately gave way to a gradual retrenchment, with this year apparently set to bring a similar evolution, albeit less extreme.

Spain’s Treasury, he made clear, has plenty of options in the event that uncertainty were to mount again, including T-bills in particular.

Last year, after the outbreak of the pandemic and the attendant uncertainty in the second quarter, the Treasury ‘issued more than we had every issued in any previous quarter’, he noted, including relatively large syndications in rapid succession.

‘We thought – wisely, I believe – that in those circumstances it’s best to issue first and ask questions later’, he said. ‘Faced with such uncertainty, cash management was a secondary consideration. It was better to have cash and not need it then to need it and not have it.’

After it became clear that revenues had not taken the expected hit, however, ‘[w]e realised that our issuance target revision had gone too far, and we had to slow down towards the end of the third quarter and into the fourth’, he said. ‘This brought us the problem of a reduction in our auction sizes to painfully small, almost insignificant volumes.’

‘This year, we expect the same phenomenon, but in a milder way, because there is more certainty’, de Ramón-Laca said. Still, there is much to be uncertain about, he observed, including revenues that now also depend on vaccination success; the timing of European funding; and the extent to which Spain’s regions redeem early debt they incurred under the liquidity mechanisms and owe Madrid.

The regions ‘just have to find investors who are willing to lend to them under more advantageous conditions than the rate we negotiated a few years ago, which is likely, because rates are much lower now’, he said.

‘The adjustment variable to all this is the Treasury’s funding programme’, he said. ‘We expect to revise downwards our initial €100 billion figure, since it was a very conservative estimate. By the summer we will be able to reduce that.’

Fortunately, the Treasury is ‘equipped with extremely powerful tools to deal with this uncertainty’, he said. Auctions can vary in size and be incentivised as needed, there are greenshoe options and there are T-bills, he said.

‘The bid-to-cover ratio of a 3-month T-bill is usually up in the stratosphere, around eight times’, he said. ‘We can issue a lot of 3-month T-bills below the ECB’s deposit rate. So in case of emergency cash needs, there are always T-bills.’

Although some debt management offices issue in foreign currencies, ‘[w]e think the euro is a reserve currency and it makes less sense for us to issue in US dollars, for example’, he said.

As for the green bond the Treasury announced in January, it will come ‘after the summer’, de Ramón-Laca promised, even if ‘[t]his year is arguably a bad year to issue a green bond, because we have crowding out of projects by the Commission.’

It will be made clear to investors that Spain is not over-issuing and that nothing assigned to the green bond is being funded elsewhere, he said.

‘So it’ll be smaller than what you’ve seen other sovereigns do, but it will still be a liquid benchmark’, he said. ‘We said between €5 and €10 billion, but given how we’ve designed the European programme, it will be closer to the lower end of that, because the Commission’s going to be financing the rest. We said around 20 years for the maturity and that sounds about right.’

In addition to the green bond, markets expect ‘at least’ a second 10-year, he noted. This would come ‘before the summer break, which in the European capital markets usually begins on Bastille Day, July 14’, he said.

The Treasury has done three syndications so far this year, including a 10-year, a 15-year and a 50-year, all of which went ‘very successfully’, he said. The Treasury usually syndicates a bit less than 20% of medium- to long-term gross funding, but this year ‘is likely to be closer to 18%, which is at the lower end of what we usually do’, he said.

De Ramón-Laca rejected worries about a shift in demand such that future syndications at the longer end of Spain’s curve might be less successful, arguing that ‘success is measured by how you achieve your target issuance and what quality you’re ultimately able to allocate. Not by the size of the book.’

‘And I say this because DMOs have often succumbed to the temptation of linking success to a very large book’, he said. ‘And that gives these hedge funds the power to remove their huge offers – that is, their inflated bids – and influence the DMO.’

Even once the economic recovery becomes more sustainable and policy support starts to be withdrawn, Spain’s lightened interest burden will stand the country in good stead, he said. The average maturity of the Treasury’s portfolio is at around 8.1 years, up from 6.2 in 2013, he noted, with the average life of medium- and long-term bonds at 13 years. Average yield of everything outstanding is currently 1.69%, ‘but is falling and will continue to fall’, he said.

‘We can’t overdo it in the 30-year or 50-year space, because we have to be very conscious of our investor base’, he said. ‘We know who we are issuing for. Spain has a structural vulnerability, which is a lack of long-term savings. We don’t have a very big natural investor base in the 30-year space.’

As a result, most of any 30- or 50-year issuance by Spain goes to non-residents, he said.

Going beyond 50 years ‘would make very little sense’, he said. ‘For Spain at least, I don’t think there is a structural demand. I know there is fast-money demand for 100 years, but when we issue, we issue for the structural, real money investor, because that’s the one that’s going to end up with this on their balance sheet. Fast money provides liquidity, and they are essential to the transaction, but that’s not who we issue for.’

Given the country’s credit rating and other circumstances, de Ramón-Laca said he was ‘satisfied’ with the Treasury’s investor base. ‘I think we have a very healthy investor base in Asia, in Europe, in Spain as well of course, in the US, and in the different investor categories’, he said. ‘But our mission is to improve the rating and to qualify for more categories of investor.’

While Spain would probably not see any change in its ratings for the time being, if investment and reform plans submitted to Brussels are implemented well, upgrades should follow ‘over the next couple of years’, he said.

As for the current risk premium of Spanish sovereign bonds at a bit under 70 basis points, this was ‘likely to continue that way’, he said. ‘Ideally, we would compress the spread even more, but that would involve more real economy factors like growth, structural reform, unemployment reduction, etc. But I think the low current levels reflect the market’s confidence that the euro will survive this and be stronger at the end of it.’

Sharply higher inflation in Spain lately did not make the Treasury more inclined to explore a linker syndication, he said. ‘Break-evens need to increase a lot more’, he said. ‘The increases in break-evens seen to date don’t imply important improvements in inflation, and here the situation in the US is radically different from the situation in Europe. So what we’ve seen throughout this year hasn’t convinced me that break-evens are likely to increase.’

 ‘Maybe next year, as and when monetary policy succeeds, which I have no doubt it will’, he added.

For actual or potential investors in Spain, the moment is favourable, he made clear.

‘So now we have the means to grow, the willingness to grow and, with Next Generation EU and Spain’s Recovery, Transformation and Resiliency Programme, we have a multi-year plan that we can execute’, he said. ‘The next few years are not going to be a problem for debt sustainability, because the interest burden is falling. This is a wonderful opportunity for us.’