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Derivatives

Spain Eyes Increased Swaps Use To Manage Debt

The Spanish treasury is considering becoming an active end user of interest-rate swaps to shorten the duration of its outstanding debt and plans to start reviewing dealers' proposals in the coming months. Carlos San Basilio, deputy director for public debt at the Ministerio de Economía in Madrid, said the sovereign has been getting its accounting and legal teams up to speed on the use of swaps. "We are going to become more active whenever there is a possibility and banks will know they can call us," he said.

The average duration of Spain's outstanding debt is 4.3 years and the sovereign is considering using plain-vanilla swaps to reduce that to 3.7 years, which is the duration its internal model deems is the most efficient. However San Basilio stressed it has not decided to pull the trigger on these trades and added, "if the market remains as [unappealing] as it is, then we will do nothing."

John Maskell, an interest-rate strategist at Barclays Capital in London, approximated that Spain would need to receive USD13 billion (notional) in 10-year swaps, the most liquid part of the curve, to shorten the maturity of its debt by half a year, as the sovereign's internal model suggests. Sovereigns can receive long-dated and pay short-dated swaps to reduce their average debt burden, a move which is tantamount to retiring longer-dated debt. The country has slightly more than EUR300 billion (USD269 billion) in outstanding debt.

"We will adapt our issuance policy to what the market needs by issuing bonds in demand by the market and we will then use derivatives to adapt duration of our debt to correct the deviation that our issuance may create," San Basilio said.

Interest-rate swaps professionals generally applauded the initiative as a good debt management strategy, although they were cautious given the lack of specifics. "There's no reason why treasuries should not have access to the [swaps] markets, they should use any type of innovation to manage their debt," Maskell noted.

Spain's ambitions come as the use of swaps by European Union sovereigns increases. The Agency France Trésor has already begun using swaps to shorten the duration of its outstanding debt, according to several market makers. Sylvain de Forges, chief executive in Paris, declined to say whether it has begun to do so, but said the Trésor hopes to reduce its 6.3-year average duration to six years by the end of 2001 and 5.5 years by the end of 2002.

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