The apocalyptic warnings about the bankruptcy of Spain if the European Central Bank (ECB) stops buying debt and raises official interest rates collide with the flexibility shown by the monetary institution throughout the Covid crisis and for the future, and, Above all, with the cost of financing borne by the State, which is at historical lows precisely because of this historical support – the average cost of outstanding debt barely exceeds 1.6% -, after not stopping falling since March of 2020.
Spain’s indebtedness has not stopped growing in the pandemic as a result of the strong increase in social spending carried out by the coalition government of PSOE and United We Can in response to the impact on economic activity of the shock of the general confinement of the spring of 2020 and of the slow subsequent de-escalation to contain the coronavirus.
Debt is currently 122% of GDP, according to the latest calculation made by the Bank of Spain, a maximum in recent decades, which undoubtedly tempts to speak of “bankruptcy”, as the president has recently done. of the PP and leader of the opposition, Pablo Casado, assuring that “it is not catastrophism, it is realism and it is responsibility . ”
The reality, however, is stubborn. The interest payment on this public debt is today much lower than that of the euro crisis that resulted from the financial shock of 2008, when the response of both the ECB and the European Commission was very different and the banks had to be rescued. The debt bill is now below € 26 billion, a far cry from the nearly € 35 billion just five years ago.
These 26,000 million interest payments represent 2.3% of GDP, when in 2013, at the most critical moment of the euro crisis for Spain, this percentage went to 3.5%. The main key that keeps “bankruptcy” away in the short and medium term and that has allowed a lower interest bill despite the over-leverage is the reduction in the cost of financing thanks to the ECB’s emergency debt purchase program (the PEPP ), which was added in March 2020 to the one that was still in force from the acquisitions started in 2015.
The average cost of outstanding debt has fallen from 2.1% in March 2020 to 1.6% today, while in the Great Financial Crisis it reached over 4.5%, still exceeding 3% just five years ago. years. In fact, the average cost of new issues has been negative in four months of this 2021 (in January, March, in July and in August), which has made it possible to refinance high-interest bonds, some from the euro crisis (specifically which were placed in 2011 above 5%), and extend the life of the debt portfolio.
The market does not foresee that these unbeatable financing conditions will deteriorate sharply and last week it was already leaked that the ECB is studying a new bond purchase program to avoid turbulence in risk premiums when emergency acquisitions are eliminated. next year.
The idea is simple: the ECB now buys more than 60,000 million euros in euro zone bonds every month (until October it acquired 80,000 million, an amount that it has recognized that it would reduce in the last quarter of 2021), and has marked in the calendar that the PEPP ends in March. However, to try to ensure a smooth transition for the markets and the economy, the agency would be studying possible alternatives so as not to shut the tap out of the blue .
According to sources cited by Bloomberg, the institution would already be working on different possibilities, of which new details could be given in the next meetings of the entity (the next will take place on October 28 and the last of the year, on December 16) .
The possibility that part of the PEPP purchases are transferred to another type of program -such as the one that was already in force before the arrival of the coronavirus, a tool with which the ECB continues to buy 20,000 million euros of debt every month- It is not the first time it has been put on the table. Last July, Christine Lagarde, president of the institution, pointed out that it was appreciated that the PEPP could “evolve towards a new format” in March 2022.
Another key to the cost of financing in Spain lies in the investments planned in the reconstruction fund Next Generation EU, of the European Commission. According to the Government, at the end of September 4,800 million euros would have been executed and another 1,000 million would be pending, in the process of being processed. These figures are far from the target of 27,000 million euros in 2021, which would have to be transferred in 2022, a year for which a similar amount to this year was contemplated.
Financing cost floor
In this context, neither the cost of financing nor the interest bills should suddenly rise, but they could have hit the ground running. Ángel Talavera, chief economist for Europe at Oxford Economics, acknowledges that “interest spending on public debt seems to have bottomed out and with the rise in debt it is unlikely that it will fall further despite the low interest rates”, but it has an impact on the fact that “the The good news is that stable spending continues to represent a lower percentage of GDP. ”
This analysis coincides with the speed with which the Public Treasury has met its net debt issuance target of 80,000 million euros.
At the end of last September, it had practically completed it, slightly exceeding 76,000 million, as a sign of the opportunity cost of taking advantage of financing conditions in the primary market, at historical lows, which could deteriorate from now on .
If you look at the secondary market and specifically the benchmark Spanish bond, maturing in 10 years, you can already see that trend. The interest that is required of him has increased to 0.5%, from 0.2% in August of this year despite the record presence of the ECB.
This performance is far from the peak stress of the coronavirus crisis, 1.2% in March 2020, and very far from the 7.6% that Spain endured in 2012.
One symptom of debt sustainability is the life of the Public Treasury portfolio, which, thanks to the unbeatable financing conditions favored by the ECB, exceeded 8 years on average at the end of September. This duration stood at 7.6 years in March 2020, while in 2013 it reached 6.2. On the other hand, the forecasts of the consensus of analysts gathered by ‘Bloomberg’ for the secondary market suggest that the interest on the 10-year bond will approach 1% in the first half of 2022, from the current 0.51%, for the progressive withdrawal of monetary stimulus from the ECB.