Spanish auction: surprising on the upside for a change

6 min read

It’s a truism that you can never second-guess future market performance but occasionally the market’s ability to confound is astonishing. Amid the meltdown in peripheral EZ debt caused by Portugal’s downgrade, there was a lot of scepticism about Spain’s government bond auction. But in the event, it hit the top end of the €2bn-€3bn range the government was targeting.

The €1.5bn threes were 2.29x covered and printed at an average yield of 4.291%, while the €1.497bn fives had a 2.85x cover ratio and went at 4.871%. Importantly, the average yields were well through the offered side of the pre-auction market; not at all a bad result, albeit with a strong following wind from domestic buyers. Despite concerns about Spain being hit by contagion selling, investors are still in the game.

Keith Mullin, Editor at Large, International Financing Review

Keith Mullin, Editor at Large, International Financing Review

To that point, Spanish government-guaranteed agency ICO got €1bn of 2014s away last week, at the time the tightest pricing all year for a Spanish guaranteed agency. The deal’s success prompted fellow agencies FROB (bank bailout fund) and FADE (electricity deficit fund) to try their luck. FROB sold €1.75bn in five-year bonds on July 6 at 270bp over mid-swaps, not far off guidance, against a €2bn book with orders from 110 accounts; FADE didn’t make it through this week’s window but is poised once the volatility subsides.

It just shows that there is some buy-side pragmatism out there and that not everyone is obsessively focused on rating agency-induced volatility. I was trying to find a way of not talking about rating agencies today, given the tidal wave of comment already out there following Portugal’s downgrade. But it seems to be the only subject in town.

And so to the rating agencies

Anthony Peters, my fellow IFR columnist and blogger (and strategist at SwissInvest), picked up on the ratings theme in his piece today. “How it has come to be,” he asked, “that the investors in hundreds of billions of Eurozone debt repeatedly appear to give more credence to the iterations of the ratings agencies than those of the authorities themselves?” It’s a great question and perhaps more considered than my comment on Monday: “Why the hell should anyone care what S&P says or does to this extent?”

Downside rating actions have a deleterious impact on market stability in a nervous market only because the professional market lets them. It’s absurd. It’s always been absurd. If everyone stopped hiding behind ratings in some sort of back-covering exercise we wouldn’t be in the position.

Politicians haven’t helped (do they ever?). Those same politicians who are now mouthing off about Moody’s rating action on Portugal and about rating agency comments about the Greek debt restructuring proposals are the same bunch who stood idly by and recklessly created a private oligopoly by embedding the raters into the Basel framework, giving them quasi-regulatory status into the bargain. The fact that the ECB bases its liquidity provision broadly on a private ratings matrix exemplifies the scale of the problem.

The media is full of vitriol, talking of ‘financial vandalism’, of the rating agencies ‘driving states into bankruptcy and destabilising the global system’; there’s talk of ‘breaking the oligopoly’ and ‘no justification’ (Wolfgang Schaube), of rating agencies being ‘dissolved before they can do more damage’ and being banned from rating countries (UN official Heiner Flassbeck). Great sound bites but typically over-done and missing the point.

On the basis that the market does exaggerate the importance of rating agency pronouncements, the other element in all of this is the one highlighted by EC president José Manuel Barroso, who said he regretted the Portuguese downgrade “both in terms of its timing and its magnitude” Timing is the key point here. The timing of S&P and Moody’s announcements of late do seem timed to cause maximum disruption, which speaks to Barroso’s other point about their motives.

Chiming in early and saying they would call default if the German or French proposals for Greece passed as initially proposed; or front-running the results of the European stress test by saying 26 banks would fail, seem to be subject to precision timing.

Their actions are now disrupting the functioning of the capital markets and inhibiting the capital-raising process. Autoroutes du Sud de la France had to cancel its €500m bond owing to market volatility, while BayernLB had to postpone its €1bn Pfandbriefe until further notice. Destroying capital-raising plans is categorically not written into the rating agencies’ mission statements. Why did Moody’s have to announce that it had placed BayernLB’s covered bond programme on ratings watch for possible downgrade just as the bank was about to print a new issue? Looks cynical to me.

Conclusions?

  1. Rating agencies’ claims that their opinions are just opinions are disingenuous and they should just stop trotting it out at every opportunity.
  2. The agencies need urgently to be decoupled from regulatory and operational process and put back in their place as purveyors of opinion for a fee.
  3. At the consumer end, there needs to be more responsibility. For investors, that means doing your own research making your own decisions and taking accountability for your actions rather than blindly pressing the buy/sell button in the event of ratings changes,
  4. Regulators should consider a quiet period around capital markets issuance, similar to the research blackout around equity offerings, so that the impact of cynical or poor timing can be minimised.