Thursday, 16 December 2010 09:20

As If On Cue After My Step By Step Illustration Of A Spanish Default, Spanish Yields Climb at Auction As Pressure Continues

From CNBC: Spanish Yields Climb at Auction, Pressure Continues

Spain was forced to pay a hefty premium at its final bond auction of the year on Thursday, in a key test of investor appetite for euro zone peripheral debt a day after Moody's said it may cut the country's rating.

The Spanish Treasury raised 2.4 billion euros ($3.20 billion), within the targeted range of 2-3 billion euros but disappointing some analyst who expected more debt to be sold.

Average yields on the two issues rose between 80 and 140 basis points from previous auctions of the same maturities.

That was a touch lower than what was expected according to trade in the secondary market ahead of the auction but analysts said the price paid by the Spanish government showed it remained at real risk of having to seek outside help next year.

"In the short term this should reduce pressure on the Spanish market, but I think when one looks at the bigger picture and considers the small amount sold, with low bid-covers, yet at a high yield, then it seems clear that peripheral markets remain under pressure and in need of support from policymakers," said Peter Chatwell, rate strategist at Credit Agricole in London.

Repeat "analysts said the price paid by the Spanish government showed it remained at real risk of having to seek outside help next year" - This was clearly illustrated and anticipated in Will Spain Default? The Answer Is Not Hard To Determine If You Take An Objective Look At The Numbers And Recent History! December 13th, 2010, to wit:

Spain is unique among the aforementioned group in that the amount of capital necessary to bail out this country is likely beyond the ken of the EU/IMF, and will likely assure a contagion effect. While it is true that Spain is not as indebted as the smaller periphery countries from a proportionate perspective, it is likely that it is not on a sustainable path and the efforts to make said path sustainable will may require restructuring/default, particularly if the smaller periphery states default.  Of course, Spain doesn’t necessarily see it his way, at least according to the mainstream media. From CNBC:

Spain Not Next in Line for EU Bailout: Finance Minister

Spain will not be next in line for a rescue package from Europe but a common economic policy is needed to support a single currency, Spanish Economy Minister Elena Salgado told BBC Radio on Friday.

This is a current snapshot of Spain as it stands now (excerpted from our subscription reportFile Icon Spain public finances projections_033010 and the online restructuring model - The Spain Sovereign Debt Haircut Analysis for Professional Subscribers):

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As it stands now, the government expects to increase its debt from 55.2% of GDP in 2009 to 74.3% in 2012. In absolute terms, the government debt is expected to grow from €580.4 billion in 2009 to €848.3 billion in 2012. However, we expect the debt to increase much more owing to a shortfall in government’s targeted fiscal consolidation, primarily on account of lower-than expected economic recovery.

Note that the Spanish government has been very optimistic in their projections, and that optimism fails (of course) to take into consideration the considerably higher debt service born from punitive market rates.

As can be seen, Spain is currently worse off in terms of financing premiums, than every other sizable nation in the Euro region that has not been bailed out already. 2011 is a big refinancing and rollover year for Spain. What will they do? We all know what they will do: Either pre-emptively restructure, default, or receive IMF/EU aid then restructure or default. There is a small possibility that they will attempt to drag this along for some time, hobbling along the way, but as exemplified by Iceland, getting it out of the way is much more expedient.

Even if Spain were to receive assistance in the form of a bailout from the IMF/EU, the problem is simply kicked down the road, and not rectified. Again, the year 2013 is the magic number and the day of reckoning.

The big issue is that the EU cannot afford any defaults or restructurings. Although their banks passed the stress test farce (including the Irish banks which passed right before they had to be bailed out), the tests did not include sovereign debt. This is what makes the tests a farce, and this is why any restructuring or default will literally render the entire EU banking system insolvent on its face (which it already is, its just that default will make it official).

Next up, we will explore the contagion effects abound in Europe. Subscribers please review:

See our subscription reportFile Icon Spain public finances projections_033010 and the online restructuring model - The Spain Sovereign Debt Haircut Analysis for Professional Subscribers), as well as the inevitability of a default or restructuring of the debt of:

  1. Ireland (Here’s Something That You Will Not Find Elsewhere – Proof That Ireland Will Have To Default…),
  2. Portugal (The Truth Behind Portugal’s Inevitable Default – Arithmetic Evidence Available Only Through BoomBustBlog),
  3. and Greece (),

The entire Pan-European Sovereign Debt Crisis series can be found here.

Last modified on Thursday, 16 December 2010 09:20

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