MNI INTERVIEW:Spain’s Interest Costs To Steady After ECB Hikes

Spain’s interest costs are set to stabilise in the coming years despite increases in official interest rates thanks to long preparation for policy normalisation by the European Central Bank, Treasury Secretary General Carlos Cuerpo told MNI.

“With regards to interest costs, we have reached a floor which we expect to maintain in the following years. As GDP grows the ratio of interest to GDP or fiscal revenues will be stable in the medium term,” he said.

Spain’s average maturity is over eight years and in 2022 only 15% of the portfolio needs to be refinanced, Cuerpo said. Issuance costs are now rising but until July the average interest on the debt was only 1.61%, thanks to borrowing at record cheap rates last year.

Cuerpo said it was difficult to estimate where Spain’s average interest rate would end 2022, though he pointed to a fall in the 10-year yield back below 2% after pushing through 3% in June.

“These estimates can vary quite a bit. The important thing is not so much the specific data, but the trend. We have assured a stabilising trend”, the Spanish official said.

SHIFTING YIELD CURVE

Asked if changes in the yield curve due to ECB tightening could alter the weight of issuance toward different maturities for the rest of the year, Cuerpo said that he did not expect any “drastic change” to the programme, as the country has already issued 70% of its medium- and long-term financing for 2022.

“We like to be predictable and offer stability to investors,” he said.

High demand from non-resident investors, at above 40% of purchasers, is another positive element that has helped Spain to prepare for the new monetary environment, said Cuerpo, adding that “this hasn’t been the case for other countries and is a sign of strength.”

Purchases under ECB programmes have mainly been from Spanish investors, reducing the feedback between the domestic financial sector and public borrowing, Cuerpo said, noting that this was an additional positive indicator.

GREENIUM

International investors have bought well above 90% of Spain’s green issuance, with high demand providing a “greenium” relative to other borrowing, he said, adding that this debt has allowed the country to reach new markets with strict investment criteria, including Scandinavian investment funds.

Cuerpo expects green issuance to keep growing over the next year, and does not rule out new green instruments.

“We want to expand the green component of our portfolio,” he said, noting that the large volumes of global green issuance expected over the next few years means that the quality of the instruments has to be maintained at a high level. The finance ministry is in contact with the energy transition ministry to ensure that funds raised are directed to projects that meet climate sustainability standards, he said.

Government spending to compensate for the energy-price squeeze has been largely balanced by increasing fiscal revenues fed by economic recovery, Cuerpo said, highlighting the positive fiscal effect of increasing employment levels in particular. As a result, there has been no need to adjust issuance plans.