New bond issue will push Spanish government debt up to 100% of GDP

The Spanish government says it plans to increase its total public debt issuance in 2014 to €242.4 billion, as its overall obligations creep up towards 100 per cent of GDP.

That means an increase of €6 billion on 2013, according to secretary of state for the treasury, Íñigo Fernández de Mesa, who unveiled the government’s public debt projections in a press conference yesterday.

However, while that figure includes existing obligations that have been rolled over, the new debt that is issued will be worth only €65 billion, down from €71.9 billion in 2013.

All of the new bonds issued will have a maturity of at least one year, signalling a shift in policy away from short-term debt.

It also emerged yesterday that Lisbon is to issue new five-year debt shortly, taking advantage of a sharp fall in borrowing costs across peripheral euro zone countries, including Ireland.

Syndicated tap
The issue will take the form of a "syndicated tap", increasing the size an existing bond maturing in June 2019, according to bankers close to the operation.

Spain’s overall public debt rose to 93.4 per cent of GDP in the third quarter of 2013 and the figure has been on a sharp upward trajectory since 2008, when it totalled only 40 per cent of GDP.

That increase reflected the country’s struggles as the economy stalled and market financing was squeezed, sparking speculation about a possible sovereign bailout.

However, in recent months, Spain has emerged from recession and is now paying much less interest on its bonds. The average interest paid for the country's debt in 2013 was 2.5 per cent.

“There has been a normalisation of the public debt markets, which has allowed us to finance ourselves comfortably and which has a positive impact on the financing of the private sector,” said Mr Fernández de Mesa.

The yield premium compared with German debt has dropped from a high in the summer of 2012 of over 600 points to its current level of just over 200 points.

“In a monetary union, the logical thing and the trend is for these differentials to end up narrowing over time,” said Mr Fernández de Mesa.

Dangerously high
"It's a dangerously high level of debt overall," said José Manuel Amor, a partner at consultancy firm Analistas Financieros Internacionales (AFI).

“But the important thing is to be able to refinance it at a reasonable rate of interest, which is what we’ve been seeing lately.”

The secretary of state also revealed that the government is considering using inflation-linked bonds this year.

Today, the Spanish treasury will hold its first debt auction of the year, seeking to raise up to €5 billion in bonds due to mature in 2019 and 2028.

Spain’s borrowing requirement pales next to that of Italy, which will issue about €470 billion of debt this year. – (Additional reporting The Financial Times Limited 2014)