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A triumph for transparency EIB’s focus on investor relations pays off |
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| Best borrowers 2011: Results index |
Ignacio Fernández, head of funding at the Spanish Treasury, has noticed a conspicuous change in the reception given to his team in roadshows over the past year or so. “We’re no longer being asked about how Spain is affected by what’s happening in other peripheral eurozone economies,” he says. “Investors are asking much more detailed, concrete questions about the Spanish economy and about the specifics of our debt management metrics.” He adds: “We’re not immune to information shocks. Nobody is. But what we have noticed recently is that when our spreads have widened in response to information shocks, they have tightened again much more quickly. That is a big change from 2010, and one of the reasons is that investors are much less influenced by headlines or unqualified statements. They want the facts and they are prepared to do a lot more analysis to make sure they have the right facts.”
Supporting the timely and accurate interchange of data between the Spanish government and the investor community has been pivotal to the Tesoro’s strategy over the past year. Critically, the funding team has prioritized strengthening its coordination with other parts of the finance ministry to ensure that economic policymakers are able to respond to the demands of the investor community.
Fernández likens this process to the movement of a conveyor belt. “The key structural change in 2010 was that we really became a two-way conveyor belt between the market and the finance ministry,” he says. “We recognized that it was essential to send the right information about market perception to the ministry, and to explain that long-term investors in Spanish bonos, or bonds, demand real rather than nominal reforms.”
He adds: “I’m not saying that we have had a decisive impact on all areas of macroeconomic policy, but we have had a very positive response from policymakers on a range of key issues. As a result, unprecedented measures have been passed in the last year emphasizing our commitment to implement structural reforms and achieve a 3% deficit by 2013. Our responsibility has been to convey this policy commitment back to investors.”
Fernández adds that the recent strength of demand for bonos has also been supported by a range of initiatives to enhance transparency and bolster liquidity. “There is always a trade-off between maintaining flexibility and increasing transparency,” he says. “But in a volatile market environment, we have aimed to become more predictable than ever before. For example, we did not cancel a single auction in 2010. This meant that investors continued to regard Spanish government bonds as reliable and liquid assets even under very volatile and illiquid market conditions.”
Fernández says that the Tesoro took a number of other measures to bolster transparency and liquidity in 2010. It lifted the number of primary dealers in Spanish government securities to 21, merged the dealerships of bonos and bills, and increased the liquidity in its outstanding medium-term and long-term benchmarks from €15 billion to a targeted size of €16.5 billion. “This allowed us to start tapping some off-the-run issues, which we did in close consultation with our primary dealers,” says Fernández.
In a parallel development, Spain used the strength of investor demand to extend the average life of its outstanding debt to between 6.7 and 6.8 years, which Fernández says is in line with Spain’s eurozone peers. “This has allowed us to manage the relationship between cost and refinancing risk. Investors appreciate that we have incorporated this clearly into our annual funding strategy.”
An obvious short-term downside associated with promoting liquidity is the risk of being used as a machine for dispensing cash in times of volatility. “There is a negative impact in that you can be used as a liquidity buffer for investors,” says Fernández. “But we think it pays off in the long term because it accelerates the process of decoupling.”
