Bloomberg News

Spain to Borrow $267B in 2013 as Bailout Pressure Grows

September 30, 2012

Spain's Prime Minister Mariano Rajoy

Prime Minister Mariano Rajoy has held off seeking aid since ECB President Mario Draghi last month said he’ll buy Spanish debt if Rajoy accepts conditions. Photographer: Jock Fistick/Bloomberg

Spain plans to borrow 207.2 billion euros ($266.5 billion) next year, the Budget Ministry said today, as pressure builds for Prime Minister Mariano Rajoy to tap the European rescue fund instead of financial markets.

Spain’s debt will widen to 90.5 percent of gross domestic product in 2013 as the state absorbs the cost of bailing out its banks, the power system and euro-region partners Greece, Ireland and Portugal. This year’s budget deficit will be 7.4 percent of economic output, Budget Minister Cristobal Montoro said at a press conference. Spain’s 6.3 percent target will be met because it can exclude the cost of the bank rescue, he said.

Spain’s borrowing plans may test investors’ willingness to continue financing the government with the European Central Bank waiting to buy the country’s debt should Rajoy agree to conditions. The government this past week unveiled 43 measures designed to boost economic growth that Economic and Monetary Affairs Commissioner Olli Rehn said go beyond the European Union’s recommendation for Spain’s restructuring.

The budget “seemed to be an indication that Spain would be asking for some official financing soon,” Megan Greene, director of European economics at Roubini Global Economics LLC, said in a Bloomberg radio interview Sept. 28. “There’s huge political pressure on Spain already.”

Maturities Shorten

Spanish 10-year bonds rallied late on Sept. 28 on speculation the nation may request a bailout over the weekend. The yield on the securities fell 1 basis point to 5.94 percent after earlier breaching 6 percent. The cost of insuring the nation’s debt against default fell 25 percent since August, the biggest monthly drop since January 2011.

Spain intends to cover 41 percent of its new financing needs by selling treasury bills and 51 percent from bonds, increasing the share of short-dated notes in circulation to 15.7 percent, the ministry said in its so-called yellow book, which provides details of the budget.

The average maturity of Spanish borrowing will fall to about 5.8 years from 6.3 at the end of 2012. Net debt sales will total 48 billion euros with 159.2 billion euros of issuance used to cover securities that mature next year. Last year’s budget deficit was revised upwards to 9.4 percent after including the cost of bank rescues, which will push the debt-to-GDP ratio up 17 percentage points to 85.3 percent in 2012.

The 207.2 billion euro gross debt issuance forecast for 2013 compares with a forecast of 192 billion euros for 2012 made at this time last year. Spain has sold 145.4 billion euros of debt so far this year.

Stress Test

“Rescuing the banks comes at a big cost,” said Thomas Costerg, an economist at Standard Chartered Plc in London. “The upward revision of the ‘all-in’ deficit may fuel fears about next year’s budget deficit targets.”

The banking system needs 59.3 billion euros of additional capital to cover losses from investments in real estate, the Bank of Spain and the Economy Ministry said yesterday. The nation will probably draw about 40 billion euros of that capital from the European rescue fund, Deputy Economy Minister Fernando Jimenez Latorre said yesterday.

Montoro outlined on Sept. 27 about 13 billion euros of tax hikes and spending cuts for next year to meet Spain’s budget deficit target of 4.5 percent of GDP next year.

‘Achilles’ Heel’

The cuts will narrow the central government deficit by 7 billion euros in 2013 as the economic slump stretching into a sixth year undermines tax income. Even that prognosis is hostage to the government’s forecast of a 0.5 percent contraction next year.

“The Achilles’ heel of this budget is the economic outlook,” said Jose Ramon Pin, a professor of public administration at IESE business school in Madrid. “If it proves accurate, the numbers will stack up.”

Economists forecast that growth will contract 1.3 percent, almost three times the government’s forecast, according to the median of 21 responses in a Bloomberg survey. Such a result will force Montoro to increase the 3.9 billion-euro reduction in spending cuts he’s imposed on ministries or reverse an increase in pension spending if he’s going to meet his target.

Before that, Rajoy may decide the conditions the EU will set on a bailout are an acceptable price to lower an interest bill on public debt that Montoro forecasts will jump 34 percent to 38.6 billion euros without intervention. That forecast assumes Spanish 10-year bond yields average 5 percent next year compared with an average of 5.966 so far in 2012.

“We aren’t in the euro to finance ourselves at these rates,” Montoro said today. “Those differentials in the risk premium make no sense in a monetary union. As soon as markets realize that the institutions are solid, they will ease.”

It’s more probable that Spain will need a bailout to lower its borrowing costs, said Greene at Roubini Global Economics. Once the premier has got past regional polls in the Basque Country and Galicia on Oct. 21, he has to face more than 20 billion euros of bond redemptions. The government must repay a 5.3 billion-euro floating-rate note due Oct. 29 and a 15 billion- euro bond that matures Oct. 31.

“I do think we’ll see Spain asking for help before then,” Greene said.

To contact the reporters on this story: Ben Sills in Madrid at bsills@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net


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