Goodbye free money: Spain faces expiration of its last 80 billion interest-free debts | Financial markets

The Spanish Treasury has managed to avoid breakneck interest rate hikes in 2022 and 2023 by curbing rising debt issuance costs. It paid an average of 3.44% on new debt sold through 2023, compared with -0.04% two years ago when zero interest rates still reigned. The rise in prices was noticeable, but the Treasury managed to avoid paying more on the new long-term debt than on the first…

The Spanish Treasury has managed to avoid breakneck interest rate hikes in 2022 and 2023 by curbing rising debt issuance costs. It paid an average of 3.44% on new debt sold through 2023, compared with -0.04% two years ago when zero interest rates still reigned. The rise in prices was noticeable, but the Treasury managed to avoid paying more for new long-term debt than for the one it issued during the worst years for government financing, between 2010 and 2013, when it paid to finance itself for more than 20 years. 10 years from 4% to 6%.

But the challenge ahead is to refinance a large volume of bonds maturing this year and next that are not paying interest. In particular, the 80 billion euros issued between 2019 and 2022 have, in financial jargon, a zero coupon: they do not pay periodic interest. This is because from 2014 to 2022, deposits at the ECB had negative interest rates: the central bank charged a fee, and this negative rate (intended to encourage lending) was passed on to the bank deposits of large institutional investors. It was more profitable for them to purchase the bond, even if no interest was paid. They buy at auction at a discount, below face value, restoring the full value at the time of depreciation, but over the years of the asset’s life the Treasury has not paid out a single euro.

The long period of zero interest rates in the eurozone allowed for this unusual development: the average cost of Spanish debt was negative in 2021. The tables began to change radically in 2022 and 2023, in line with the rise in the price of money on the ECB. The rate hike increased the average cost of issuing new Spanish sovereign debt by 3.5 points over two years and increased the cost of all sovereign debt outstanding to 2.09%. Despite this, the increase in the interest rate paid by the Treasury on the outstanding debt balance is more modest, just 45 basis points more than the 2021 minimum, thanks to efforts in previous years to extend the average life of that debt. now, 8 years later, and the interest that Spain’s sovereign role has maintained among investors. From now on, the Treasury faces an even greater challenge.

Raising interest rates as early as the summer of 2022 finally eliminated the negative rate at which the Treasury sold bills. They were the last debt asset issued without paying interest and now carry interest rates above 3%. What now remains ahead is the refinancing of all debt begun in the years before the increase and for which the investor now does not receive any interest. The first maturity that the Treasury expects for this debt, which it sold for free, will be on May 31 next year, when a zero coupon bond will be issued in December 2021 for an amount that will reach €19,477.4 million. This will be followed later this year by another bond issued in April 2019 with a coupon of 0.25% and a volume of €17,697.44 million.

Rough wayIf we take as a basis the current yield that the market requires for three-year Spanish bonds is around 3%, then refinancing these bonds will require additional costs of around 2,400 million euros.

Higher cost of debt

In 2025 there will be two more bond issues with maturities that were launched in 2020 and 2022 and for which the Treasury now pays nothing, for a total amount of €42.165 million. And there are still issues issued at zero rate that will expire in the coming years, such as 21.3 billion zero rate bonds issued in 2020 that expire in January 2026, or 22.79 billion. also with a zero rate, which expire a year later.

“The average cost of debt will grow, but not at an accelerated pace. There are still a lot of debts that are paid at very low rates, about twenty calls with a coupon below 1.3%”explains Salvador Jimenez, AFI expert. Barring an inflation disaster, eurozone interest rates will not rise again, and expected cuts this year will help soften the cost of issuing new debt. But the new rates won’t be the zero-rate rates that made government funding so much cheaper a few years ago. Globally, and taking into account the combined effect of the rising price of money from 2022 and refinancing at higher rates, the average cost of debt will continue to rise. Jimenez estimates the increase to be between 30 and 40 basis points this year and about 2.5% through the end of 2024.

Investors’ renewed appetite for long-term government debt, and their interest in securing the best possible yield before rates start to fall, will also play in the Treasury’s favor. The recent 30-year syndicated issue – the first for this term since 2022 and attracting more than €83.7 billion in demand – shows that the toughest moment for long-term financing will be behind us. In fact, the Treasury saved the entire game last year. It was able to issue long-term debt at lower interest rates than it had been paying for years for bonds sold during the last crisis, when investor mistrust of Spain’s sovereign debt soared. Last October, when Spanish bond yields stood at 4%, a level not seen since late 2013, 10-year bonds issued in May 2013 had an even higher interest rate maturity of 4.4%.

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