T E N E R I F E ’ S O N LY Issue 686
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W E E K LY N E W S PA P E R
14 January 2011 - 20 January 2011
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Chinese takeaway! 3billion-euro-bond sale will give Spanish economy a welcome boost AS WE go to print, the Spanish and business press are filling with stories of how Spain has successfully raised nearly 3 billion euros with a Treasury five year bond launch yesterday (Thursday). It follows hot on the heels of Wednesday’s 1.25-billion-euro bond success for Portugal. It was the first debt auction of the year in Spain but the interest offered was the highest since the year 2008 at 4.59%. The rate is 27% higher than that offered at the last similar auction which was 3.601% Demand for the offer is said to have doubled supply, and the sale has not negatively affected the risk differential with Germany. However there are three further auctions planned for this month, the first on the 18th for yearly and 18 month bonds, followed by an auction of ten year bonds on the 20th and one for three and six months on the 25th. Over 2011 as a whole the Spanish Treasury hopes to issue bonds worth 47.2 billion euros, 24% less than the amount achieved in 2010, to meet the effective financial needs. But what does this mean in layman’s terms? It means that a bond, almost like an IOU, has raised 3 billion euros. The authorised issuer in this case Spain owes the holders of the bonds a debt and, depending on the terms of the bond, is obliged to pay interest (the coupon) and/or to repay the principal at a later date, termed maturity, in this case 5 years. Thus a bond is like a loan:
Li Keqiang, China’s Executive Vice-Premier meets King Juan Carlos, following his successful deal with Spanish Prime Minister Jose Luis Rodriguez Zapatero
the issuer is the borrower (debtor), the holder is the lender (creditor), and the coupon is the interest. Bonds provide the borrower with external funds to finance long-term investments, or, in the case of government bonds, to finance current expenditure. The money will go further towards stabilising the Spanish economy, which already has been successfully clawing back the deficit following 2010’s austerity measures. This raising of funds should help end speculation that Spain is in trouble, as if it were, no one would have purchased the bonds. Recent rumours raised by
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speculators about a Spanish bail-out were dismissed by Spanish Prime Minister Mr. Zapatero as “complete insanity” and “intolerable”. Spain has a comparatively low debt amongst advanced economies, at only 53% of GDP in 2010, more than 20 points less than Germany, France or the US, and more than 60 points less than Italy, Ireland or Greece, and it doesn’t face a risk of default. Spain and Italy are far larger and more central economies than Greece; both countries have most of their debt controlled internally, and are in a better fiscal situation than Greece and Portugal, making a default unlikely unless the situation gets far more
severe. But who has bought this strange purchase – China? Last week China pledged to purchase in total six billion euros worth of debt this year, that’s approximately 16 % of the total cash that Spain will raise this year from the international markets. Sources estimate that China already holds 10 % of all Spain’s national debt. But why does a far eastern country with 4,000 years of history want to help Spain? China is a wealthy country it can save the euro and as well has a whole range of personal reasons for wanting to do so. Firstly, China want to have an alternative to the dollar and currently with the US
have heated discussions as to the value of their respective currencies. Secondly, helping Europe is in China’s interest as around 16% of China’s exports end up in Europe, if their currencies were to revert, in this case back to Peseta, China would lose one of its key markets. Europe has many things that are attractive to China, only last week Sinopec, the Chinese state oil company bought a 40% stake in Spain’s Repsol – Brazilian operations. Spanish exports such as olive oil, wine and Iberico ham, renewable energy technology and air traffic control systems are just a
few of the goods that Spain now intend to export to China. China is a massive nation, with an estimated population of 1.3 billion, if only a small proportion of them bought a Spanish commodity, or just a handful visited the country and islands it would make such a massive difference to the economy. China now has the world’s fastest-growing economy and is undergoing what has been described as a second industrial revolution. Perhaps that should be the next flight route to open Beijing to Tenerife South as opposed to some hub in yet another European cash strapped country.