Craig Eisele on …..

January 14, 2012

Just the beginning of a long difficult expensive process

Filed under: Uncategorized — Mr. Craig @ 3:37 pm

Spain and Italy: only just begun

Posted by Cardiff Garcia on Jan 12 20:48.

So Thursday morning’s auctions of Spanish bonds and Italian one-year T-bills went well, and on Friday there’s an Italian bond auction for up to €4.75bn.

The Spanish sale was especially impressive — from the FT earlier, emphasis ours:

Spain’s auction was particularly successful, selling almost €10bn of new bonds maturing in 2015 and 2016, twice the maximum target set for the sale and at much lower rates than at the last auction of comparable bonds, in one swoop taking away almost a third of the country’s estimated €36bn borrowing requirements this year.

We’ve previously tossed up other 2012 debt rollover schedules. But it doesn’t hurt to be reminded that we’re just getting started here, and Credit Suisse has an epic-length report on European public finances that includes useful summaries of the financing needs of both countries.

We’ve chucked it in the usual place, but we’ll just post a few highlights below, noting quickly that we’re less sanguine than Credit Suisse both about the prospects for European economic growth, and about the impact of austerity measures on said growth. But who knows.

Emphasis ours in all cases, and Spain first:

We estimate that Spain’s central government has roughly a €40bn net financing requirement in 2012 while €50bn of bonds will mature this year. Excluding T-bills, total gross financing needs should be €90bn this year. Additionally, the Treasury is expected toroll over €75bn of bills. Revenues from privatisations could lower the financing needs to acertain extent although it is unclear whether the sale of the national lottery, for example, (€8bn) will go ahead.

Key bond redemptions this year are concentrated on April, July and October – and broadly coincide with the months of largest tax revenue intake. Redemptions of bonds and bills in each of those three months top €20bn vs. redemptions of €10bn or less in the remaining months of the year. Financing requirements for 2012 are slightly lower than lastyear and should continue to decline marginally over the coming years, as the budget deficit moves towards balance.

And Italy:

Excluding bills, the Italian government faces just over €220bn of financing needs this year, just a touch higher than 2011’s issuance of €210bn. Bond redemptions account for €194bn and the government deficit for just under €30bn, on our estimates.

Financing needs are higher in H1, with significant bond redemptions. As Exhibit 35 shows, in February, the Italian government will need around €60bn and around €50bn in March and April including bills (€42bn, 36bn and 35bn, respectively, excluding them).

Given tensions in financial markets and the relatively high yield on Italian bonds, a key question is how Italy will go through next month’s large redemptions (€26bn of a ten-year bond at the beginning of the month and €11bn of a two-year bond at the end of the month).

The Treasury is planning to introduce retail bonds from this year, as an alternative to alleviate some of the pressure on medium-to-long-term bond issuances. Moreover, the government has some cash buffers available (over €23bn at the end of last year in the cash account at the Bank of Italy, for instance), but if financial markets remain severely impaired, Italy will have to work on some financial repression move – pushing domestic banks to fund the government – or count on external help.

With the IMF already in Rome, officially to certify the implementation of reforms, it seems that things are being prepared for a more significant involvement of that institution, if needed. It is worth noting in this context, the recent decisions by euro area countries to increase IMF’s firing power with €150bn via their central banks in December, as well as the creation of a new lending facility. The new IMF’s Precautionary and Liquidity Line (PLL), has been designed for countries with sound economic fundamentals in a liquidity crisis and has light conditionality attached to it. As such, we would see any involvement of the IMF to be quite different from the one in Greece, Portugal and Ireland.

That said, bills and bond auctions at the end of last year were encouraging. The average yield on bills halved, to 3.2%, compared to similar auctions held in mid November, while the yield on ten-year bond issuance dropped a little bit as well.

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