It wasn’t supposed to be like this. For many of the most seasoned commentators in the sovereign, supranational and agency sector, the question of a Spanish sovereign bail-out was when, not if. Secondary pricing had been pushed down accordingly.
But Spain appears to be living in a paradox. As long as the expectation of a bail-out lingers, the corresponding downward pressure on yields means that the urge to ask for assistance is lessened.
This paradox was compounded by the reaction to three words — “whatever it takes” — from ECB president Mario Draghi last July and the unveiling of the central bank’s secondary market intervention policy in September.
That doesn't seem like much of a foundation for the drop in yields that followed, but the proof is in the results. Beleaguered Spanish regions have printed deals over the last few days. The sovereign itself was able to wipe 100bp off the cost of its 12 month and 18 month funding at bill auctions on Tuesday.
Spanish agencies have also fared well so far in 2013. Fondo de Amortizacion del Déficit Eléctrico’s €1bn long four year came at 53bp over Bonos last week, an improvement on its previous benchmark in December, which paid 73bp over the sovereign. And it won plaudits for selling 45% of the bond outside Spain — a feat matched by fellow agency Instituto de Crédito Oficial, which sold €700m of private placements to non-Spanish investors last week.
Elsewhere in the periphery, the Republic of Italy sold a €6bn 15 year benchmark at the tight end of guidance on Tuesday. The Republic of Ireland printed its first syndicated deal since requesting a bail-out last week, receiving a book of more than €7bn before printing €2.5bn.
Those results suggest that there is clear demand for peripheral eurozone sovereigns. But it could be fleeting. Spain’s 10 year secondary yields crept up above 5% again on Monday. Analysts blamed supply-related pressures — but also a note from Moody’s on Spain’s structural challenges. The 10 year yield was back below 5% on Tuesday, but Monday’s trading shows how quickly sentiment can turn.
Whatever positive signs there might have been, Spain can't ignore the risks. A poor response to a syndication would be disastrous — it could be the final shove that forces Spain over the edge into a bail-out, with all the pain that this would entail. The secondary rally might well be being supported by the expectation of a bail-out and the ECB’s backstop, but that does not mean a primary syndication would be.
But against that must be weighed the consequences of waiting until it is too late. Senior bankers reckon that if there has ever been a time for Spain to come, it is now. Some argue that not doing so presents the greatest risk of the country sinking into the bail-out swamp.
Such arguments are made with at least half an eye to a mandate, of course. But an opportunity exists for Spain to answer its critics and prove that it has market access. It should be taken.