EXCLUSIVE: Spanish Treasury’s General Director: Greece Upgrade Would Be Positive for Whole Area
11 May 2021
- Impact of ECB Tightening ‘Manageable as Long as Financing Conditions Remain Favourable’
By David Barwick – Frankfurt (Econostream) – Spain’s sovereign debt issuer would stand to benefit overall if fellow Eurozone member country Greece were to see its sovereign rating upgraded, 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 as long as Spain did its homework and the European Central Bank safeguarded favourable financing conditions, the impact of any tightening by the ECB would be manageable.
An eventual return of Greece to investment grade status would ‘mean stronger prospects not just for Greece, but also for the euro’, de Ramón-Laca said. While some investors currently holding Spanish assets could theoretically shift away from Spain and into an upgraded Greece, ‘[i]f there is such an effect, it will be marginal’, he said.
‘But the effect with respect to the prospects for the whole of the Eurozone will be very significant and positive, and Spain will benefit from that’, he added.
A related question, he noted, is the potential for a crowding-out effect on Spain from EU Commission issuance to fund Europe’s recovery plan. ‘After all, they’re going to issue a lot and might compete with us for the same investors’, he said.
‘But that would sooner be a problem for those countries whose bonds have behaved like a safe asset in the past, meaning Germany and France’, given these were ‘the safe-asset proxy for Europe’, he said. ‘So that might crowd out a little bit of demand for Bunds or OATs. But for us, the availability of a safe asset crowds us into a larger portfolio.’
The reason for this is that ‘the size of [investors’] European government bond portfolio is determined by how much in safe assets they can have at the bottom of the risk spectrum’, he explained. ‘Having more safe assets will allow them to buy more of us.’
De Ramón-Laca attributed Spain’s stably low sovereign spread to the ECB, which ‘has been very successful, even though it doesn’t try to contain spreads as its primary objective’, he said. ‘But what the ECB does ultimately results in spreads being contained.’
In particular, the ECB’s focus on preserving favourable financing conditions means that ‘the market’s not concerned that Spain is going to get into trouble’, resulting in the stability of the risk premium on Spanish government debt, he said.
ECB asset purchases are not leading to undue concerns about liquidity for the Spanish Treasury, he indicated, noting that the ECB owns less than 30% of Spain’s debt. For Bunds and smaller issuing countries the situation could be different, he acknowledged.
‘But the upside of a bad thing, namely having a lot of debt, is that we can afford to have a liquid market’, he said. ‘And every year we have a lot of funding needs, so we have to do a lot of issuance, and at the same time we replace a lot of outstanding issuance, which also maintains liquidity. So I’m not as concerned.’
He continued: ‘Other countries with less debt outstanding and lower yearly funding needs will have a harder time maintaining liquidity throughout the ECB’s QE. They would have to carry out operations that in net terms don’t amount to more debt, meaning an exchange where they buy back and issue as needed. We don’t have to.’
While conceding that ‘[t]here will be an impact’ when the ECB eventually tightens policy, ‘that impact will be manageable as long as financing conditions remain favourable’, he insisted. ‘And I’m persuaded by the Governing Council’s manifestations that whatever they do, they will ensure favourable financing conditions for the real economy, which means for us as well.’
The European sovereign debt crisis was a reflection of redenomination risk, the materialisation of which would have meant devaluation in Spain and revaluation in Germany, so that spreads increased, he reasoned.
‘If the Governing Council has now understood, as I think it has, that the increase in spreads is what’s to be avoided, then as long as favourable financing conditions are maintained in the legitimate exercise of monetary policy, whatever the ECB does won’t spell too much trouble for us’, he said. ‘The bottom line is that our debt becomes more sustainable if we do our real economy homework, if we get the vaccination campaign right, if we implement structural reforms and grow. And that’s how it should be, and everything else less relevant. As long as we do what we have to do, I’m relatively calm.’
An elevated debt-to-GDP ratio is not the issue it once was, he said. In 2008, Spain had a ratio of 35% and a AAA credit rating, versus the current situation of a ratio of about 120% and a notably lower rating, he observed.
‘Having a ratio of 120% is in many ways unfair for the next generations; my four-year-old son is incurring debt to pay his grandparents’ pension’, he said. ‘But in terms of its total revenues, it costs the taxpayer the same as when we were a AAA with 35%.’
Spain is nonetheless determined to reduce its debt-to-GDP ratio ‘gradually, without hurting the rest of the economy, because it is unfair’, he said. ‘But we are less concerned than we would have been in the 1980s even if rates were at the same levels then.’
As a corollary to this paradigm shift with respect to the meaning of high debt, the numerical stipulations of the EU Stability and Growth Pact, ‘calibrated on the basis of 1980s data’, need to be questioned, he suggested.
‘From a technical point of view, there are essential differences in rates having to do with long-term structural elements of the world economy’, he said. ‘I think these should be taken into account before binding ourselves politically to a particular number.’