Spain can’t sell its bonds

Spain pulled a potential sale for 15-year bonds as the appetite for the issue just wasn’t there. Before the Euro, some in the European debt capital markets, where I worked, pejoratively called Portugal, Italy, Greece, and Spain, the PIGS. Because they had very poor government fiscal management before the Euro, as sovereign debtors, they had spreads which were very wide to German Bunds, then considered the gold standard of European sovereign debt issues.

But, after the Euro was agreed to, many in the bond markets went short Bunds and long PIGS as a ‘convergence’ play causing sovereign spreads to tighten — and with good reason as those countries got their fiscal houses in order and have generally performed well in the decade since.

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Spain pulled a potential sale for 15-year bonds as the appetite for the issue just wasn’t there. Before the Euro, some in the European debt capital markets, where I worked, pejoratively called Portugal, Italy, Greece, and Spain, the PIGS. Because they had very poor government fiscal management before the Euro, as sovereign debtors, they had spreads which were very wide to German Bunds, then considered the gold standard of European sovereign debt issues.

But, after the Euro was agreed to, many in the bond markets went short Bunds and long PIGS as a ‘convergence’ play causing sovereign spreads to tighten — and with good reason as those countries got their fiscal houses in order and have generally performed well in the decade since.

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However, with global market turmoil roiling a number of major markets world-wide, it seems that de-convergence is now underway and spreads are widening. Are bond markets looking to bring back the PIGS?

Spain has suspended an auction of sovereign bonds as investors take fright over the country’s property crash and accelerating slide into economic crisis.

The treasury pulled an expected sale of 15-year bonds after probing the market informally, saying it would wait until credit conditions began to calm down. “We are not facing financing problems. We placed a successful three-year note on Wednesday,” said a spokesman.

Government officials have been shocked by the intensity of the downturn now engulfing the country. Car sales fell 31pc in June, industrial production has fallen 5.5pc over the past year and the collapsing property sector is shedding almost 100,000 jobs a month.

Miguel Sebastian, the industry minister, said the economy had ground to a halt in the second quarter and was now in “virtual recession”.

Telegraph, 11 Jul 2008

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Tension within the EU continues to mount. Watch this development going forward.

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