Ah, the intricacies of Spanish debt instruments. As fears over Spain’s sovereign risk ebb and flow, BarCap analysts have weighed up the various asset classes on offer in its debt markets. The results should intrigue Spanish risk-watchers.
As the AAA Investor note explains, emphasis ours:
…compared with neighbouring asset classes such as sovereign debt, covered bonds or government-guaranteed debt, papers issued on behalf of Spanish autonomous communities offer a pick-up. At the same time, they enable investors to diversify their country-specific exposure at the expense of the ailing housing market and in favour of the public sector, whose aggregate financing needs are nonetheless set to surpass €27bn in 2010.
This is in the context of what BarCap calls a ‘paradox of choice’ for investors faced with exposure to Spain: lots of classes to choose from, but little diversification among those classes so far.
Which is indeed odd — because Spanish debt types seem to be diversifying markedly.
In terms of risk, it now appears Spain’s regional governments are out in front, stealing the limelight from even ICO — the state-backed development bank and former FT Alphaville risk stalwart.
The evidence, according to the AAA Investor, can be found all over the issuance data. Spanish government bond issuances remain well out in front, while paper issues by sub-sovereigns have declined. However, there’s a new issuer on the block:
Asset classes that had previously been subject to very moderate issuance volumes, among them debt issued by Spanish autonomous communities, for example, also benefited from the increasingly benign situation on the global financial markets. This, in combination with a surge in the aggregate deficit to €27bn in 2010 from €12bn in 2009, has caused issuance volumes to increase sharply as of late, amounting to nearly €7bn year-to-date.
In light of that, BarCap goes on to compare swap spreads:
Provided the richening of peripheral European sovereign swap spreads continues, swap spreads of Spanish agency and government guaranteed debt will likely tighten further, in our view…
In light of their hitherto relatively modest new issuance volumes, swap spreads of debt issued by Spanish autonomous communities have remained relatively unaffected…
However, taking into consideration their nature as sub-sovereign issuers (which, admittedly, are subject to an explicit no-bail-out clause under the Spanish Constitution), we understand a swap spread difference of roughly 60bp between sovereign (eg, 4.400% SPGB January 2015) and sub-sovereign debt (eg, 3.250% VALMUN July 2015) to be somewhat elevated (Figure 7)[click to enlarge:]
Extending the analysis to a comparison between Cédulas Hipotecarias [mortgage-backed bonds] and debt issued on behalf of Spanish autonomous communities further supports the above results. A 40bp swap spread difference between papers backed by residential mortgage loans on property located in Spain (eg, 3.125% SANTAN Jan 2015) and (public sector) debt issued by Generalidad Valenciana (eg, 3.250% VALMUN Jul 2015) is hardly justifiable in light of the current state of the Spanish housing market.
Problems are certainly mounting up for Spain’s regions and municipalities. Thursday’s FT noted that they have become rather lackadaisical in paying debts owed to Spanish businesses — which is surely something of a vicious circle, given Spain’s problems stem from a large private debt overhang.
And regional problems are mounting up for Spain’s central government, too. As the Journal recently reported, its deficit reduction plan hinges on the regions’ restraining of their public spending. Rather tricky, with all that autonomy.
Related links:
The great European SSA recovery. Save Spain? – FT Alphaville
Spain’s ICO distortion – FT Alphaville
Riding on a sovereign guarantee in Spain – FT Alphaville
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