Evolution of Spain’s debt dynamics

who is who in the Spanish debt market Jan ‘15

El déficit por cuenta corriente se redujo a más de la mitad hasta 900 millones euros frente a los 2.000 millones en Q1 2019. Mientras que la necesidad de financiación bajó hasta 300 millones en el primer trimestre de 2020, por debajo de 1.200 millones de un año antes. El superávit corriente se sitúo en 29.000 millones o 2.4% del PIB frente a los 26.000 millones o 2.1% del PIB de un año antes.

Aggregate debt across developed economies, excluding financial sector debt, went from 230% GDP in 2007 to 272% GDP in 2013, with U.S, U.K and the Eurozone presenting broadly similar leverage ratios and trends.

The rise in the aggregate leverage ratio during 2008-2014 masks a decline, or a least a stabilization, in private sector borrowing & spike in public debt.

In Spain the stock of household + non-financial corporates is < 200% GDP, in Germany < 150%. Translating this into external debt terms calls the sustainability of the recent growth trend into question.

The peripheral economies had relied on debt to fund growth in domestic spending, and the corporate sector which translated into investment rates of over 25% of GDP.

This took place without an intense correction in aggregate savings or GDP spending. However, when 2007 crisis broke out and the financial markets ground to a halt, the correction in the external borrowing requirement was fuelled by collapsing investment rates.

1. The reduction in savings rates against the backdrop of shrinking income and high public debt is crucial to understanding the slow pace of deleveraging in peripheral nations.

In economies such Italy & France, the correction in investment levels was accompanied by a similar drop in savings, which is why their stock of external debt has not come down.

The main agent channelling debt overseas was unquestionably the banking system itself, which had external debt at end of 2008 of 810 bn euros, a figure.

These external counterparties included:

1. Issuance placed abroad.

2. Interbank deposits held by foreign banks.

3. Amounts owed to the ECB

It is important to additionally highlight the significant flow of ‘cross-financing’ evident in 2008 between NMFI (non-monetary financial institutions) & the banks.

The NMFI owed the banks around 300 bn euros mainly due to:

1. Securitization bonds issued by NMFI & acquired by banks.

2. The banks owed the NMFI around 730 bn euros mainly due to bank deposits held by numerous funds. It also encompasses the subordinate loans extended by the banks to the securitization funds, which served as credit enhancements tools, thereby facilitating their placement with investors, particularly foreign investors.

The fund sizeable effort to place their paper overseas is evident in the 322 bn euros of debt owed by the NMFI to the rest of the world.

Non-financial corporations + NMFI + Banks decreased from 2008 to 2014 about 300 billion of euros or about 30% of GDP.

Household debt dynamic decreased by 42% of GDP during the same period.

Government debt increased to 600 billion of euros during 2008-2014 time.

Public sector acquired Bank’s debt was driven by buybacks of public debt, since the ECB launched its long-term liquidity scheme in 2012.

LTRO or long-term refinancing operations with the clear-cut goal of facilitating the acquisition of sovereign bonds by providing banks with a stable funding at low interest rates. Total public sector debt with bank system was 445 billion of euros in 2014.

Banks financing operations with NMFI stood at 527 billion of euros, or a decrease of 200 billion mainly driven by mortgage bond segment, lack of investor confident from the outset of the crisis.

NMFI external counterparties requirements were 100 billion of euros in 2014, down from 322 bn in 2008. The decrease of this balance, on aggregate, is attributable to a significant reduction in the role played by NMFIs in channelling foreign savings into Spain. Non-financial corporation’s debt moved from 278 billion to 290 billion, the balance taking the form of securities is very small, with bank credit supplier predominant at 560 billion, of which trade finance is circa 20%.

Together the financial system; both Banks & NMFI saw a reduced debt of 400 bn during the period 2008-2014, even though still represented about 50% of external financing needs.

The predominant role of the banking system; this is banks and credit institutions in general, in Spain’s financial system where banks are the biggest counterparty to the nation’s debt, both private and public. Private in the form of bank’s loans; either home or mortgages or consumer finance. Public debt issued securities, in the form of notes, bills, bonds and bank loans.

Banking system in Spain has shifted loans to productive activity, this have lost weight relative to public sector financing. Banks are still the treasury’s most important financiers as they are the most active investors in the securities it issues.

Overall financial system, this is banks and NMFI wholesale credit decreased from 1.620 trillion of euros to 1.485 trillion in 2014. Net country’s debt in Q1 2020 was at 71.6% of GDP or 885.770 m euros (at close of 2020 was 77% of GDP or 925.900 euros). It includes Spain’s interests abroad.

Gross financing borrowed to Q1 2020 was at 173.5% of GDP or about 2.147 trillion euros (which was at 2.11 trillion or 169.4% GDP in 2019).

Source: evolution of Spain's debt dynamics: who is who in the Spanish debt market. (Spanish economic & financial outlook - Jan 2015)