Nearly every day I receive emails from Bran who lives in Spain. Over the weekend I received an interesting article, originally in Spanish, on funding Spanish debt.

The article suggests that the situation for Spain is pretty grim.

Bran writes …

Hello Mish,

Here is an article on Spanish debt that I thought you might find interesting. It is an overview that I find quite balanced , by a Spanish writer, and maybe gives a little depth to the situation here.

I translated with Google and then corrected it.

All the best, Bran.

Translation from Bran

Debt Maturity

The question of coming Spanish public debt maturities seems lately it is becoming one of the most analyzed themes in estimating the solvency of Spain and the derived consequences for its sovereign risk.

If we focus on the numbers, the Spanish Treasury has maturing, in the remainder of 2010, with interest and principal 25.799 million euros in bonds and obligations, and the sum of 40.071 million euros in Letters. That makes a total of 65 870 million in maturities that need to be renewed between now and year end, to which we would have to add the current deficit financing for this year. At the Central Administration the figures talked of are always relative.

Displaying the maturity by month, the strongest concentration occurs in July (about 23.327 million euros). So, we are therefore very close to the main test to be faced by the Treasury in the remainder of the year.

For 2011, the maturities of short-term instruments total EUR 34.573 million and long-term amount to 62.209 million EUR, ie EUR 96.782 million in total. In 2012 and 2013 maturities (in this case speaking only of bonds and obligations) are 61.268 million euros and 61.224 million euros, respectively.

More than 500,000 million of debt

In short, now to 2013 the total Central Administration debt that matures is EUR 285.144 million. If to this amount we add the debt of the other authorities (Regional and Local) and agencies and public enterprises, the total amount is almost doubled and we would be talking about a figure in excess of 500,000 million euros. To put it in comparison to other countries, this amount represents half of the commitments that Italy will face and four times the equivalent of Greece.

The next question is, is that a lot or little? Or to put it another way, does it justify the current differential of about 200 basis points of Spanish long term titles with respect to the German equivalent? Is that risk premium exaggerated or is our sovereign rating in danger?

Certainly, the answers we give to these questions will depend on the evolution of many other variables, not only Spanish but also international , given that Spain is now a cornerstone for analyzing the mechanism of self-sustainability of the euro and credibility of the whole European project.

Obviously, if the answer was easy or immediate, it would not require this text and many investors would be more clear on many decisions that are now subject to a high degree of uncertainty.

One thing we can say is that after the measures recently announced by the Spanish Government in reducing public expenditure, scrutiny will focus on short-term income. This means that the data for the growth of our economy will be watched very closely in the coming months.

Market Sentiment

If the economic situation has not improved in the coming months, in addition to the VAT hike, markets are likely to understand that it is necessary to further increase taxes, something that has been made known by the Economy Minister possibly for after the summer.

But in addition to the severe scrutiny of the dynamics of growth of our economy, there remains an additional problem is that capital markets are largely closed in terms of daily trading. That is to say, when one looks at the valuation screens of most bonds (not just Spanish) in many of them quotations of purchase or sale do not appear or, if present, within a fork of parameters so wide that it does not serve as a valid reference.

If we add to this negative perception that has installed itself in foreign investors to everything bearing the label peripheral Europe and has made it that they flee risky assets in these countries, it is understood that the issue of solvency is intrinsically linked to a problem of mistrust.

To sum up, perhaps the current differential of the Spanish public debt is more typical of an BBB issuer than to an AA + issuer, but for that to return to the levels that existed until a few months ago, not only will it be needed to stand firm on decisions to cut deficits despite the context of extreme weakness of growth, but also international confidence must return to those countries that have suffered a greater deterioration of public finances. It seems not impossible , but it is something that will be tied to sacrifices and time.

The eyes of the international community are largely placed on Spain and, as in the World Cup, hopefully after a sharp setback we will be able to get up and move on.

Valentin Fernandez, director of Fonditel.

Mike “Mish” Shedlock
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