Two brokers talk at the Stock Exchange in Madrid on Tuesday, Nov. 23, 2010. Spain needs to fund a colossal and mounting financial deficit which could reach €25-billion in its big power utilities.Paul White
Spain is not Ireland, nor is it Greece and there will be no bailout in Spain. Government officials in Spain have been singing the same tune over recent days and on Wednesday Elena Salgado, the Spanish finance minister insisted there was absolutely no risk that Spain would need a rescue.
The euro zone was being subjected to "speculative attacks" which Spain was in a good position to resist. Unfortunately, the speculative attacks are occurring just as Spain needs to refinance a multi-billion euro liability in the country's energy sector.
Spain needs to fund a colossal and mounting financial deficit which could reach €25-billion in its big power utilities, including Endesa, Iberdrola and Gas Natural. Bookbuilding was due to commence Wednesday for a government-backed bond issue to raise funds to help eliminate the so-called "tariff deficit" in the Spanish electricity industry. This is the shortfall in power company's books between the cost of supplying electricity and the regulated tariff set by the government. The government has promised to eliminate the shortfall, caused by unprofitable activities, such as renewable energy and supplying power to remote islands, over three years by raising consumer prices.
However, reports from the Spanish press indicate that the chaos in the bond markets has pushed back by a month the first placement of €3-billion of the tariff bond. Soaring government bond yields have raised the cost of borrowing and increased the risk in any government fundraising. The total tariff deficit is currently €16.5-billion but the government expects the ultimate bill to be as high as €25-billion.
The bond markets could make this liability hugely expensive for the energy companies. Ms. Salgado was on Wednesday responding to an extraordinary surge in the Spanish cost of borrowing. The Spanish 10-year bond rose above 5.1 per cent, a level at which the spread between the Spanish and German benchmark bonds is the widest since Spain joined the euro. These rates are a worry, not only for the banking sector, where liquidity is stretched, but for a big industrial refinancing to which the Spanish government is committed to guaranteeing some €25-billion of utility debt.
The idea was the bond issue would eliminate the deficit in the books of big power companies, such as Endesa and Iberdrola, by securitising the revenue collected from future electricity price increases and turning it into capital represented by the state-guaranteed bonds. Power companies had viewed the funding of the tariff deficit as low-risk and inexpensive due to the government guarantee over funding. However, the turmoil in euro zone bond markets has turned upside down market perception of risk. Meanwhile, the prospect of success for an unpopular government to impose rolling tariff increases on Spanish consumers looks less certain at a time when unemployment rates are soaring and state benefits are being scaled back.
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