Spain's Funding Needs Continue

While Ireland, Greece, and Portugal do not have to sell any more bonds this year, Spain, on the other hand, has three more bond auctions this year and three more bill auctions. Spain seeks to sell up to 4 bln euros of bonds tomorrow. In December it will hold two bond auctions--Dec 2 and Dec 16. The latter date coincides with an EU Summit.

Spain's economy is weak. It contracted for 7 consecutive quarters through Q4 09 before expanding in Q1 (0.3% quarter-over-quarter) and Q2 (0.3% q/q) before stagnating in Q3. Q4 may have begun off on firmer footing as the manufacturing PMI rose in October to 51.2 from 49.6 in Sept, but the non-manufacturing PMI deepened its move into contractionary territory by falling to 46.5 from 47.9.

Spain's federal debt to GDP is modest near 60% (lower than Germany's), but in euro terms it is larger than Greece and Ireland together. Of course, private sector debt (especially banks) local and regional debt increases both the indebtedness of Spain and the channels of contagion.

As we see in Irish events, the government coffers are one thing and the banking sector is another. Many Spanish banks have been locked out of the wholesale market and it is forcing them to compete for local deposits and this is serving to drive down margins, which further aggravates the pressure on them.

Moreover, the rising risk premium on the sovereign spills over on banks funding as well. Over the past month, Spain's 10-year yield has risen 63 bp. Of course, Greece (259 bp) and Ireland (181)have perform worse, but the rise in Spanish yields is near Portugal's (75 bp). And Portugal is thought to be just behind Ireland in potentially needing assistance.

Slower growth in Spain acts to increase the deficit level, and hurts the denominator of the deficit/GDP ratios. Lastly, Spain itself is on the hook to help Greece, Ireland and Portugal. If the euro zone's EFSF or the EU's EFSM is tapped by Ireland, as looks increasingly likely, Spain's debt burden will grow.