More on Pagarés

Noting the unusually large number of readers that clicked through the links in our previous post, another entry or two on the world of pagarés would seem to be in order.


On the left is a chart, compiled from BdE data, of the 12-month rolling sum of the nominal issuance of both these and normal corporate bonds. A few things to keep in mind...

1). These numbers refer to issuance by non-financial companies;

2). The pagarés referred to are those registered with the Spanish market supervisor, the CNMV. They do not count the personal version one might write in conjunction with a real estate transaction, for example (or to get one's bookie off one's back);

3). Pagarés, generally with maturities of one or two years, have comprised between over 50% of the total debt issuance market, in 2001, to about 1/8th, in early 2007.

The total Spanish corporate debt issuance of 200 billion euros in 2007 is pretty amazing in itself, but a look at these two series normalized uncovers an interesting indicator - and right lively it is - of the country's economic situation. Keeping in mind that December 1998 is equal to 1, and not 100...

1). The relative issuance of pagarés began to go ballistic in the summer of 2006 - a date that we believe more or less coincides with the arousal of doubts concerning the real estate venture on the part of financial institutions. Within less than a year, they were already engaging in their first equity for debt exchanges;

2). The turning over from the peak in annual issuance coincides with the bankruptcy of Bear Stearns;

3). Issuance went net negative at a moment most famous for the dissolution of Lehman Bros.;

4). Despite some signs of second order recuperation one year ago, the market today remains below zero almost to the same degree that it was positive at the heights of the real estate bubble.

One could argue that these promises to pay are no different from junk bonds, but that would display an unacceptable lack of respect for an instrument that has been around since the middle ages, even (according to this Spanish pagaré-specific website) predating the bill of exchange that was the precursor of modern paper money. Their current form as zero-coupon bonds appears to be fruit of the successful attempt to circumvent ecclesiastical laws prohibiting the charging of interest on loans. All of the above fails to point out that that they seem to have provided the net non-bank financing to Spanish corporations in one of those years, 2001, in which this country was the source of virtually all of the economic growth the European Union could lay claim to.

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