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MNI INTERVIEW: Spain Funding Needs Fall, NextGenEU Adds Demand

Borrowing by the European Union will fuel demand for euro-denominated sovereign debt, not crowd it out, a Spanish Treasury official says.

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Spain could cut its 2021 debt issuance targets for the remainder of the year due to higher-than-expected Next Generation EU transfers, with funding needs likely to be lower again in 2022, the Spanish Treasury General Director Pablo de Ramon-Laca told MNI, adding that new EU borrowing would fuel more demand for euro-denominated sovereign debt rather than crowd it out.

Close to 57% of Spain's gross issuance programme for this year has already been met, with EUR124.5 billion pending. However, Spain now expects to receive more than the EUR6.8 billion in NextGenerationEU funds anticipated earlier in 2021, and with Spanish regions' early redemption of central government loans granted in previous years, the Treasury could adjust its 2021 issuance target downwards in the coming weeks, Ramon-Laca wrote in response to emailed questions.

Gross funding needs in 2022 will likely be lower as a result of the deficit reduction foreseen in the 2021-2024 Stability Programme update and lower debt redemptions, he continued, with the Spanish government estimating a public deficit of 5% of GDP in 2022, down from the 8.4% projected for the current year.

A new Green bond with a maturity of between 20 and 25 years will be issued in the fourth quarter of 2021, representing a "new structural component of the Treasury's funding strategy, not just a one-off project," Ramon-Laca said. But there are no plans to sell foreign currency bonds this year.

NO CROWDING OUT

Spain has enjoyed stable, strong market access this year, Ramon-Laca said, with steady interest from foreign investors, and strong demand for both shorter and longer tenors. This week's successful syndication of a new 10-year benchmark, one week after the EUR20 billion NextGenerationEU Inaugural bond was issued, suggests European debt issuance is likely to have a crowding-in, rather than a crowding-out effect on demand for sovereign debt, he added.

"Not only will NGEU issuance directly contain our funding needs, but it will also support demand for SPGBs, by increasing the share of euro-denominated assets that investors can hold in their portfolios.

"This paints a very positive picture for Spain. NGEU will contribute to financing the large investments we need to undertake to leave the pandemic behind and boost long-term growth, while at the same time increasing investor demand for SPGBs and EGBs more generally."

Equally, the unwinding of the ECB's PEPP programme is unlikely to be a severe blow to European bond markets, Ramon-Laca said.

The importance of bond-buying to the ECB's attempts to get closer to its inflation target, the results of the strategy review will be key to determining the pace at which its purchases continue, he added, noting too that Governing Council members set to look closely at whether a strong Q3 is a sign of a structural recovery.

"An unwinding of PEPP will imply a context of gradually increasing long-term interest rates, which will see this "natural" demand return to European sovereign debt markets. The return of this "natural" demand would compensate the lower PEPP purchases."