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Spain Grabs Historic Opportunity To Extend Debt

Source: Reuters - Mon 20th Jan 2014
Spain Grabs Historic Opportunity To Extend Debt

Spain is taking a grabbing a historic opportunity to lengthen the average life of it's debt and pull themselves out of a dangerous spiral of short-term refinancing obligations.

Spain has said they plan to issue longer-term debt, taking advantage of a revival in appetite for such high-yielding bonds to free themselves from the treadmill of keeping up with frequent repayment deadlines.

Even now, more than 40% of Spanish debt expires in the next 3 years, according to calculations by Reuters.

However, if they can tap into renewed investor interest and keep selling long-dated bonds, they can fundamentally improve their financing position, which had investors so leery in 2011 and 2012 that many outside the eurozone predicted the bloc's imminent fracture.

Signs of economic recovery this year and central bank safety nets introduced to tame the crisis, which erupted in Greece in 2010 and spread to the region's other highly indebted nations, have helped bring down Spanish 10-year borrowing costs by about half a percentage point so far this year.

Falling overall financing costs argue for longer maturities to be issued. The total average interest rate Spain paid on its debt was 3.73% at the end of 2013, down from 4.07% in 2011, according to Treasury data.

Spain can now sell 9-year bonds at its average rate of funding, whereas late in 2011 it could not even sell 3-year bonds at the then average rate.

"Increasing it (the average life of debt) must be the biggest theme of the year for Spain," said David Schnautz, rate strategist at Commerzbank in New York.

"It's a very realistic plan. Pension funds and others have nominal yield targets and stepping down the credit spectrum is the lesser of many evils for them. Looking at what Germany offers, you can double that with (Spanish bonds)."

But while growth holds down the debt burden relative to GDP, Spain remains acutely vulnerable to shifts in sentiment with debt loads of 0.9 times economic output.

At the end of 2013, the average maturity of Spanish debt was 6.2 years – the shortest since 2004 and off highs of 6.82 years.

"As the crisis wanes and the fiscal situation improves, they still have to issue a lot [of bonds], not because of a high [budget] deficit, but because of high redemptions," said Gianluca Ziglio, an analyst at Sunrise Brokers.

"This makes the bonds less attractive... If issuance shifts towards longer maturities, investors would have to ask a premium for it."

He added though that a major reversal of the falling trend in bond yields was not necessarily on the cards. Only another dip into recession or a political crisis could cause that.

In the future, investors would actually consider a longer life of overall debt an appealing feature of those markets.

Spanish 10-year borrowing costs trade at their lowest in about 4 years at around 3.75% and not far from euro era lows.

Their 15- and 30-year bond yields are also at, or close to, multi-year lows, and just over half what 2-year yields were at their crisis peaks.

In its 2014 strategy, the Spanish Treasury said its aim was to at least stabilise the average maturity of its debt. Spain this year has already sold about 5 billion in 2026 and 2028 bonds and analysts expect a syndicated deal for a bond maturing in at least 10 years to be scheduled soon. By this time last year, the longest bond it sold was a €7 billion, 10-year through a syndicate of banks.