Markets can be very impatient when it comes to states trying to refinance near-term obligations during a sovereign debt crisis, don’t you find?
Exhibit A — Greece, April-May 2010.
Exhibit B — Spain, June-July 2010?
The Spanish government is indeed facing a large funding need for July. Spain has to finance a cash deficit of between €10bn and €15bn, plus €24.7bn in redemptions on bonds, according to Goldman Sachs’ Javier Pérez de Azpillaga on Friday.
But it’s not clear if this could create a funding crisis. As Goldman’s analyst writes:
As with Greece earlier this year, investors are trawling through the details of the Spanish government’s financing needs for the very near term. The focus is not so much on the government’s long-term solvency—which depends mainly on economic performance and fiscal policy—but on its ability to raise enough funds to cover the monthly cash deficits (the difference between tax receipts and outlays) and the refinancing of maturing debt. The fact that this ability is being examined is in itself bad news if only because of the potentially self-fulfilling results of that questioning.
How cheering. So let’s look at the size of the problem — assessed by Goldman with data plus some educated assumptions:
- The government raised €8.3bn in June on a net basis (€16.5bn in new issuance minus €8.2bn in t-bill redemptions).
- We assume a cash deficit of €17.5bn in June and of €13.5bn in July, a shade below the corresponding prints in 2009.
- The Treasury had €18.3bn in cash at its disposal at the end of May.
- We assume the government raises €16.5bn through gross issuance in July, the same as in June. With redemptions coming due in July amounting to €24.7bn, net issuance will be negative (-€8.2bn).
From these data and the assumptions made, Pérez de Azpillaga estimates that Spain’s Treasury will already have depleted its reserves of cash by €9.2bn by the end of June — to make up the difference between that month’s cash deficit and the net issuance.
Plug in the remaining €9.1bn reserves to help cover July’s funding needs, and we seem to be left with a €12.6bn shortage.
All these assumptions are based on available data. Pérez de Azpillaga also observes that the government could have reduced the cash deficit already, by cutting spending or delaying payments. But if it hasn’t:
…the government may issue bigger amounts of paper than we have assumed, even if it has to pay more for it. In this vein, the government has indicated it will issue a special, syndicated bond in Q3—it issued one such bond in February, for €5bn.
More speculatively, the government has large amounts of financial assets (apart from the €18.3bn in cash it had at the end of May). While most of these assets are illiquid—public loans, shares, foreign loans—some may be more easily sold or given as collateral against commercial borrowing.
Finally, the Treasury has arranged credit lines with commercial banks, which can be used as a last resort.
Which is all very striking, in that a) the credit of Spanish banks themselves isn’t looking rosy at the moment; and b) a source in Spain’s economy ministry informed Reuters only recently that Spain doesn’t have to issue any more bonds to help deal with the redemptions coming due in July.
Well, we wonder about that.
Related links:
European SPV, meet Russian playwright – FT Alphaville
More on Spanish credit lines – FT Alphaville
Charting Europe’s grim sovereign-banking loop – FT Alphaville