It looks as though things are becoming less and less dire by the week in Europe. Pressure continues to abate against the nation of the PIIGS. Even if austerity protests are taking place in Greece today, we saw a narrower current account deficit in Greece this week than we have seen since Greece joined the Euro. Now we have seen that Spain is actually doing a dollar-denominated bond offering worth $2 billion. The bonds come with a five-year maturity and bids were apparently up for around $3 billion. Spain’s borrowing costs were listed as close to about 300 basis points over the equivalent swap yields.
This is an about-face compared to the third quarter and part of the fourth quarter of 2012. After the European Central Bank’s promise of 2012 to do “whatever it takes,” the markets started to stabilize. If Spain can access new sources outside of Europe for debt offerings, that is not only going to tighten up their yields but it will also offer additional sources of funding. The pundits may continue to raise questions. Our viewpoint on that is that you should continue to expect the pundits to raise questions. In fact, we still have many of the same questions in the years ahead that we had last year. What is different now is that the financial markets are operating close to normally.
One caution that investors need to take with such news is that it is possible that we are in a yield-hungry environment. Investors may be chasing yield regardless of risk. Is 3-points over Treasuries worth the risk to loan the money to a country in dire straights like Spain? That depends upon who you are, but it is enough for some investors who ponied up enough bids for up to about $3 billion worth of these notes.
Investors should know that Spain still has to raise close to $100 billion (U.S.) from now through the end of 2013, assuming all things remain equal. Spain is also expected to likely miss its own targets under austerity measures and under financial ratios.
Today does not end the recession for Spain nor for the PIIGS in general. It does, however, indicate one more bit of information indicating that the hangman is not walking into the room soon.
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