Exclusive: Transcript: Interview with Spanish Treasury Director General Díaz on 26 September

2 October 2024

By Marta Vilar – MADRID (Econostream) – Following is the full transcript of the interview conducted by Econostream on September 26 with Carla Díaz Álvarez de Toledo, director general of the Spanish Treasury.

Q: How will the ECB’s easing cycle affect the Spanish Treasury's debt issuance plans? Can it have an impact maturity-wise for the bonds you plan to issue by 2025?

A: At the Treasury we maintain a fairly stable issuance strategy. We try not to make our issuance strategy opportunistic, and we tend to maintain a very predictable pattern with four syndications and two new 10-year bonds every year, and then we alternate issuing a 15-year and a 30-year bond. This year we issued a 30-year bond and next year we expect to issue a 15-year. Really, we are not adjusting the programme to short-term changes in the interest rate environment, but rather maintaining a more strategic and structural vision in our issuance programme.

We do maintain flexibility in the auctions to reopen those bonds that are most in demand by the market and provide liquidity to them, that is where we are more flexible. We even regularly reopen off-the-runs if we see that the market needs liquidity.

Q: Do you think you could issue bonds on the longer part of the curve in 2025 because there may be more demand for that part of the curve?

A: As stated, in terms of syndications we have a stable pattern and then for the auctions we keep flexibility to adapt to the bonds that are in demand at any given time depending on liquidity needs. If there is a bond that is particularly in demand, we adjust accordingly.

Q: Treasury bills have been highly demanded by the market, especially by retail investors. Do you think that now, in this easing cycle, high demand for Treasury bills could diminish?

A: In recent years we have seen unprecedented  demand from retail investors, growing every month. What we have seen this year is a stabilisation in monthly growth and what we are seeing above all is reinvestment demand; in other words, retailers are renewing their holdings. Bills have been a very useful and attractive instrument in recent years and retail investors now hold almost 38% of outstanding bills, which is an all-time record. At the moment, we see that most retail investors are renewing their holdings and they can easily access the auctions. We have also invested a lot in the electronic channel to make it easier for them, and this has also had a positive effect.

Q: Have you made any estimates of how demand may behave next year for bills and how it may affect the issuance plans for 2025?

A: We always have a very low net issuance target in bills: zero or slightly positive. The retail investor has access to the auctions just like any of our market makers and can access and buy directly at the auctions.

Q: How much does the Treasury expect the average cost of Spanish debt to come down as a result of lower rates?

A: After the ECB’s rate cuts our average cost of issuance has already fallen by 90bp from the peak in October 2023 to August 2024, from 3.96% to 3.06%. This average cost of issuance will gradually feed through to the average portfolio cost.

Q: How is net debt issuance going compared to the target in your issuance strategy? It was €55 billion for 2024 and you didn’t reach the target on other occasions.

A: Well, we do a global funding programme that includes both bonds maturing and net issuance. Our target was €257 billion this year and so far we have executed more than 80% of the programme. We usually do frontloading in the first half of the year as part of our prudent approach to have room for manoeuvre in case of need. The programme is progressing well and we expect to complete it on schedule.

Q: The Treasury still had one more debt syndication to do this year and that was done on Tuesday this week. How did it go?

A: We are very pleased with the outcome of the syndication. It was a new inflation-linked benchmark, a 12-year bond so that it can be our benchmark as a 10-year bond over the next few years. It was a point on the curve that we needed to open up and was very much in demand by investors. There was already some expectation that we were going to do it. It has also served to demonstrate the Treasury’s commitment to the inflation-linked bond programme and to gradually add liquidity to the curve. The timing was very favourable, as illustrated by an order book exceeding €50 billion, the highest demand for an inflation-linked bond in the euro area. This, together with the fact that we were going to issue a relatively small volume - we ended up issuing €4 billion- allowed us to adjust the price substantially. In fact, we cut the price twice and from an initial indication of 25bp above the November 2033 benchmark, we ended up setting the price at 22bp above that benchmark.

The quality of the investor base was also very high both in terms of geography and type of investor, which demonstrates the usefulness of this programme in diversifying the Treasury's investor base. Central banks, insurers and pension funds together have taken more than half of the issuance, and then there is also the geographical distribution, with areas such as Asia, the Middle East and the Nordic countries each taking more than 10% of the issuance.

Q: Will there be any more syndications by the end of 2024 or there are no more expected?

A: We usually do four syndications per year. We have already completed all four in 2024 and given the progress of the funding programme - we are more than 80% complete - the remaining auctions are going to be relatively small, because we are very close to completing the programme.

Q: Going back to the issuance target, could we again be at a year where we get a lower-than-estimated figure in terms of net debt issuance?

A: The issuance programme is prepared to be able to adjust it to different variables and different contingencies. Keep in mind that this year's net issuance is already €10 billion lower than last year, so there has already been a substantial reduction, and we are comfortable at the current level for the time being.

Q: The average total interest rate for July, which is the last data I could see, was 2.209%. If I understand correctly, it is at the highest it has been in recent years. Do you think it is going to exceed that figure any time soon or is it going to start coming down now?

A: During the low interest rate era, we extended the portfolio’s duration so that every year a very small part of the portfolio has to be refinanced, namely around 13%. This means that interest rate changes are only gradually passed on to the portfolio. It is a risk reduction strategy; in fact we have seen this during the ECB's hiking cycle. The ECB raised interest rates by 450bp and the average cost of our debt has risen by 56bp. This is little more than one tenth of the total ECB tightening. It is an impact that is gradually being passed on, and that is the advantage of having a high average maturity. Now what we have seen is a decrease in the cost at issuance, which indicates that there is a cap on the average cost increase but that the impact is going to be gradual on the average funding cost of the portfolio, because as we refinance a small part each year, this is gradually being passed on to the portfolio.

Q: The average life of the portfolio has increased by 10bp from the beginning of the year to the date of the latest data in July. It is now approaching eight years, and the trend in recent years had been a downward trend. How do you assess this increase?

A: Since the low interest rate period, we have been increasing the average life of the portfolio, and in the last few years it was already close to eight years. We are comfortable with that average life, we consider it to be a fairly successful risk management strategy that has allowed us to smooth out interest rate variations. Going forward, we are comfortable with this level, and we are going to receive some NGEU loans, with an average maturity of 20 years, and this will also give us flexibility in our issuance programme in terms of maintaining the average maturity of the portfolio.

Q: Is it going to stay there, or do you think it may, as per the trend of the last few years, go down slightly?

A: It has been quite close to eight years in the last few years - a little bit up, a little bit down - but in general it is quite close, and we are moving in that environment, regardless of small variations from time to time.

Q: Going back to issuance, could the Treasury do any 2025 pre-funding with around €142 billion in coupons and redemptions next year or is there any interest in doing buybacks?

A: Next year's redemptions are at very similar levels to this year. I think there is a €3 billion difference. The funding programme will be quite similar to this year’s. It is true that the Treasury has a strategy of smoothing the issuance pattern, but given that the volume of redemptions is quite similar to this year's, we already have stability in the pace of issuance. Repurchases are not part of the Treasury’s regular toolkit.

Q: So you rule that out.

A: We have not done it so far and we are comfortable with the volume of the programme.

Q: Do you think the gradual reduction of the European Central Bank's balance sheet will continue to be welcomed?

A: The impact is very gradual, as the ECB holdings mature gradually. On the other hand, what we are seeing is that investor demand remains high, in particular in all the syndications this year. We were talking before about Tuesday's syndication, but also in the 10-year bond syndication we had a record demand of €140 billion euros. Investor demand is particularly strong from non-residents, which is helping absorb the reduction in ECB holdings very well. In fact, in the last year and a half, we have seen an increase in non-resident holdings of Spanish government bonds by more than €100 billion euros.

Q: It would be rare for the European Central Bank to accelerate the pace of balance sheet reduction while it is cutting rates. But if it does happen, do you think it could significantly affect the market?

A: At the moment it is being absorbed very well, we are seeing strong investor demand also because of the strong fundamentals of the Spanish economy, growth and fiscal consolidation. Inflation expectations are well anchored and this soft landing seems to be achieved, which reduces the need for the ECB to take any additional measures. In any case, the ECB has the necessary instruments to deal with periods of financial instability, should the need arise.

Q: Speaking of non-resident investors, since February we have started to see a slight downward trend in bond holdings held by foreign investors.

A: As there is some seasonality in the data,  you have to compare data in the same month in different years. What we have seen is that in the last year and a half, €100 billion of non-resident investment in medium and long term debt has come in. Holdings have remained above 40%. In fact, at the end of 2022 they stood at 40.3% and in the latest data we have, which is from June 2024, they stand at 42.7%, which compares to 40.7% in June 2023, so we see an increasing trend. In each issuance we see a strong participation by non-residents, with more than 80% of syndications awarded to them.

Q: So far the Treasury has issued one green bond in 2021. Do you plan to issue any more elsewhere along the curve?

A: We did indeed issue the first green bond in 2021, and we are reopening it regularly. Every year we are issuing around €3.5 billion in green bonds, which is a substantial amount. At the moment we have focused on providing liquidity for this bond. Its current size is €13.5 billion and it still has room to reach the benchmark size of Spanish government bonds of at least €20 billion. Once we approach that size, we would consider issuing new bonds to gradually build a curve with sufficient liquidity.

Q: Countries such as Belgium and Italy have already started to sell bonds to retail investors. Is the Treasury considering making any kind of incursion into this retail investor sector beyond what we are seeing now?

A: Retail demand is being very well absorbed by Letras (short-term bills). We have Letras up to one year, in line with tenors of many of these retail bonds. In our case, retail investors have direct access to the auctions through the electronic channel and through the Bank of Spain and it is working well. Just as they have access to the Letras auctions, they have access to the bond auctions, so they can invest in both Letras and Bonos and Obligaciones without any restrictions.

Q: Debt has risen again to 108.2% of GDP. Do you think it can stay below the 110% target by the end of this year?

A: There is a seasonal component to that ratio. At the beginning of the year it tends to increase, because that is when we concentrate issuance due to the usual frontloading of the funding program, and as bonds mature, it goes down. At the end of 2023 we had initially closed at 107.7% and with the growth revision we find that the final figure for 2023 is already at 105%. This means that we have brought forward our debt reduction targets by one year, because this year we had planned to finish at 105.1% and we have already achieved this by the end of 2023. The forecast is that this year we are going to finish at 102.5%, which implies a reduction of more than 20 percentage points since the peak, which is a fairly significant rate of debt reduction in the last four years. The fiscal consolidation is also quite ambitious when compared to other countries in our European environment.

Q: I understand that it is more on the GDP side because the Spanish economy is doing much better than other European economies. Do you think that this good performance of the Spanish economy can be maintained in the short and medium term?

A: The reduction in debt is in part due to GDP growth, but it is also due to budgetary consolidation. The deficit has fallen from more than 10% to the 3% that we are targeting this year. The dynamism of the economy and significant growth differential with respect to the rest of Europe is acknowledged by a number of organisations, both national and international, which are revising upwards their forecasts. Just yesterday the OECD revised its growth estimate on Spain to 2.8%. This dynamism is based on solid foundations and growth is balanced.

On the one hand, labour market performance is very positive, both in terms of the number of jobs created and their quality, because we are seeing an increase in permanent contracts. Migration flows are also causing a positive shock to potential growth in the medium term, generating greater possibilities for growth in the Spanish economy. Within this balanced pattern, employment is being created in high value-added sectors that increase the productivity of the economy. This is where we are seeing the strongest growth in employment.

Another illustration of the balanced pattern of growth is the performance of the external sector. Traditionally in periods of growth the Spanish economy used to have a trade deficit. Today, the external sector is one of the driving forces behind the growth of the Spanish economy, which demonstrates the structural change in the economy. We have been running a current account surplus for more than a decade, which has allowed us to reduce private indebtedness in the Spanish economy, and exports have diversified both in terms of markets and products. In services, tourism continues to be very important, but we are seeing very significant growth in non-tourist services, which leads to a more diversified growth pattern.

Another driver of growth and change is the implementation of the recovery plan with investments and structural reforms that are going to have an impact on the potential growth of the economy, and investments are going to continue to support the growth of the Spanish economy in the coming years. The European Commission itself recognises that it is having a differential impact on the growth of the Spanish economy.

Q: Turning to the ratio of public debt to GDP, it is expected to fall below 100% by 2027. Do you think it is feasible to achieve the target?

A: We have a fairly rapid pace of public debt reduction, as already noted before. With the revised growth data, the fiscal path has yet to be updated, but already in the previous debt targets we envisaged debt below 100% in 2027, so now that growth is even higher, this should be feasible. In fact, from next year onwards we expect to have a primary surplus balance, which should also contribute to this debt reduction effect.

Q: The risk premium has come down from over 100 points a year ago and is now around 79. Moreover, today the news is that Spain is below the French risk premium. Do you think that this downward trend can be maintained?

A: What we have seen is a structural trend, and in recent years there has been a compression of the Spanish risk premium. In fact, we are now at around 80bp, down from 100bp at the start of the year. What we see is a structural trend towards a reduction in the risk premium and this is not interrupted by periods of market volatility, where Spanish debt performs better than that of some other European countries. This is a recognition of the solid fundamentals of the Spanish economy both in terms of growth and budgetary consolidation efforts.

In addition, there is now an upward trend in credit rating reviews with positive outlooks that should be supportive of this trend.

Q: Just a few days ago, Moody's and S&P reviewed Spain's rating but without making any change. However, there are quite good feelings about the Spanish economy. Could S&P Global Ratings, for example, upgrade its outlook to stable at some point?

A: S&P's is the highest rating we have and Moody's is the lowest. The latter has a positive outlook since March, when they raised it. They said from the beginning that the normal review period is between 12 and 18 months. We will have to wait.

Q: Draghi proposed in his report that there should be more Eurobond issuance. The EU is an issuer with a very high rating and a high yield, so it could absorb a lot of investor demand. Is there a risk that a lot of that demand could go to the EU if more Eurobonds are issued?

A: The European Union is already a large bond issuer. We are seeing that it is perfectly compatible and that demand for Spanish debt is still high, and they can coexist perfectly well. Moreover, these issuances, as proposed in the Draghi report, would be done in order to finance European public goods. Spain's position has always been that these European public goods should be financed jointly because they have externalities, and that the optimal solution is joint financing, also from the point of view of debt sustainability of individual Member States.