Peter Tchir

I think you can consider Spain shut out of the debt markets

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I wouldn’t trust anything now until they have a program in place with the ECB.
Peter Tchir

Peter Tchir

So Spain held an auction today. They sold just over a billion of 10 year bonds, at what looks like an average price of 94.45. They sold 2 billion of other issues, but this is the most interesting one.

The pricing was in line with where they were trading on the secondary market. The «success» of the auction helped push markets higher.

But let’s be honest, most of the buyers were hoping that they would be reward at 8:30 am EST when Draghi would unveil his «whatever it takes» plan.

It is unclear what exactly the ECB will do, but before we find that out, Spain has to ask for help. It is clear that Draghi isn’t doing anyone a favor. If you want ECB intervention you do it formally and ask for the help.

So in order to see what Draghi and the ECB will do Spain needs to ask for the help. There were enough things said in the meeting today, that it is reasonable to believe the help will be forthcoming and useful, but until Spain asks, nothing is going to happen.

Well, those 10 year bonds finished down almost 3.5 points on the day. That is brutal. It is bad enough if you held bonds, but the auction will leave a particularly bad taste in investors mouths. They added risk, based on at least a reasonable assumption, that some good news was going to come out. They did not get that news, and are down 35 million euros on that bond alone.

Any last ounce of trust and credibility for Spain in the public debt markets is gone. You just don’t do that sort of thing. Caveat emptor. The buyers were taking risk and got burned. That is the buyer’s problem, but how does someone step up for the next auction?

For all you know they will sell you bonds and enact some new law the next day that hurts your bonds. This was very sloppy and I cannot imagine investors buying any more bonds until Spain signs up for a program.

Maybe I’m wrong, and investors will hoover up 7% bonds at the next auction, but I certainly wouldn’t. I wouldn’t trust anything now until they have a program in place with the ECB.

I really think holding the auction makes today a bigger problem for Spain than it would have been otherwise. Holding the auction makes it seem like Spain was taking advantage of the situation. Spain had to be pretty well aware of what the ECB was planning to say and do.

Would skipping the auction caused Spanish bonds to sell-off? Yes. Everyone would have known something was up and the market would have sold off, but I’m not sure it would have gotten much worse than we are now, and Spain wouldn’t have destroyed relationships with the new issue buyers.

Better yet, maybe Spain could have signed up so that today’s ECB meeting wouldn’t have been such a mishmash of crud. Though knowing Europe, all the application forms are in Germany, and the person who takes care of them is on vacation, but that’s okay because the person in Spain who would fill them out is also on vacation.

Anyways, I’m expecting we will get an announcement that Spain has signed a deal and see some buying, but this whole process is just bad, and even if Spain announces a deal, I’m not sure they will be able to tap the longer end of the market for awhile after this.

Copyright © 2012 · Peter Tchir

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