Noting that the thirst for yield, outrunning the fear of ruin, led to the Greek government finding itself with 20 billion worth of bids for today's 5 billion euro 5-year bond offering, we thought we'd assemble a chart (actually two-in-one) on the Spanish borrowing of money. The blue line shows historical debt-to-GDP since 1995 and the orange and red the split between foreign and domestic counterparties to the debt component of the ratio over the same period.Worth observing are:
1). Making a rough guess as to what the figures will be at the end of 2009, the debt-to-GDP ratio for the Spanish economy appears to be equal to that of the 1995 recession, and slightly below those of 1996. Readers might keep in mind that projections for 2010 are considerably higher.
2). The ratio was in constant decline from 1996 through 2007, even during the 2001 downturn - reasonable, considering that Spain provided virtually all the EEC's economic growth in the early part of the decade.
3). Tracking the decline in debt-to-GDP was that of the domestic market share for government bonds through 2007.
4). In the mid-90's, the Spanish government funded itself predominantly in the domestic market. Following the 1998 conversion of financial market transactions to euros however, foreign demand for this debt soared. Since 2005, this has been an even split.
5). The huge increase in bond issuance over the current year has not affected the ratio of foreign to domestic lenders - this despite the conclusion one might be inclined to arrive at on reading of the supposedly exorbitant degree domestic banks and cajas have been gorging themselves on local guvvies.
6). In the midst of last Thursday's Greece-inspired mayhem, Spain sold off 1.25 billion of a '1 to 2 billion' 20-year yielding 85 points over the equivalent German debt. Given the serendipity of the timing, we don't see the result as boding much ill.
As an aside, those that might think that last week's EUR/USD weakness was mostly related to the tanking of Greek bonds should keep in mind that gold also simultaneously went south. Terminal confusion in euroland would have had these moving in opposite directions. The degree to which exchange rates reacted to all this might be reflected by EUR/GBP, however - less pronounced than the former, but a trade we think might have legs.Chart courtesy exchangerates.org.
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6 Comments:
So . . . should I exchange pounds now or wait?
CB,
"5). The huge increase in bond issuance over the current year has not affected the ratio of foreign to domestic lenders - this despite the conclusion one might be inclined to arrive at on reading of the supposedly exorbitant degree domestic banks and cajas have been gorging themselves on local guvvies."
The 'supposedly' seems to imply that you are also a contrarian on this. I don't know enough to say whether they are gorging themselves or not, but the point of the huge increase in debt is that they can gorge themselves and still leave some for the foreigners that want part of the action.
"6). In the midst of last Thursday's Greece-inspired mayhem, Spain sold off 1.25 billion of a '1 to 2 billion' 20-year yielding 85 points over the equivalent German debt. Given the serendipity of the timing, we don't see the result as boding much ill."
Sovereign debt markets have been a lot more boring than they were last year. Always useful to remember ourselves (as your omnipresent charts in the top right hand corner help us to) that in the middle of last year 10-year yields for Spanish debt hit 4.5% - so a lot has to happen yet before we get worried on that front.
Finally, I was going to criticise you for reinventing the wheel with your chart when we have the one from el Banco de España (http://www.bde.es/webbde/es/estadis/infoest/e0603.pdf), which I love. But then I noticed that you have added value by going further back in time and presenting the data as a % of GDP. So thanks - very nice chart.
Un saludo. By the way, flipáa tu madre.
you fail to mention that Greece had to do it at 30bp more than existing debt. So now they actually have a higher debt costs.
Colin - Ambrose would suggest you wait seeing as the euro is going to zero.
b - I think the argument was that Spanish banks were 'surreptitiously' funding the national deficit via the ECB window and the yield curve. For this to have been proof of aberrant local behaviour would have required an increase in relative domestic to foreign participation. It's not really contrarian - just noting the obvious that governments fund deficits with debt issues and risk averse investors (like banks with broken balance sheets) buy them. Spain's presumably special circumstances did not cost it an iota of 'market share' at given rates.
Thanks
Anon - no question about that. But the real message for me is that buyers, in the midst of a spate of horrible news, slept overnight on the sidewalk to get at it.
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