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Spanish Pension Reserve Fund : All In For Spanish Debt !

( From El Pais, Digital Journal, Bloomberg, NEPO Project, WSJ, Evernote, Zero Hedge, )

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Banco de Espana Economic Forecast



​​Weak domestic demand is, in turn, the result of the continuing downward path of its public and private components. In particular, the consumption of households will continue to reflect the fragile labour market and the impact of fiscal consolidation on their real incomes, against a backdrop in which their high indebtedness will continue to drain funds from household budgets, leaving little room for gross saving, the weight of which in disposable income will fall for the fourth consecutive year.



​​​​​D omestic demand is projected to decline sharply in 2013 (-4.3%), and by more than in 2012 (-3.9%). In particular, among the components of private demand, the fall in private consumption is expected to accelerate, to -3%, against a background of a further decrease in nominal income, basically due to the marked weakness of labour income. However, as in the last few years, the decline in household consumption will be tempered by lower saving. Also, residential investment is expected to fall for the sixth consecutive year, at a rate of around 10%, which is somewhat higher than in 2012, in line with the acceleration in the rate of decline in the number of residential building permits in the second half of 2012. Accordingly, it seems likely that the contraction of household income, tight financial conditions and the uncertainty regarding house price developments will continue to limit the demand for residential housing.

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Conclusion



High unemployment rate, government still adding to the austerity measures and wolrd economy slowing will continue to put pressure on the Spanish economy and consumers...​​



And having already tapped almost entirely the Social Security Reserve Fund , and having to find buyers for the estimated €207 billion in debt it plans to issue in 2013, up from €186 billion in 2012, to cover central-government operations, debt maturities of 17 regional administrations, and overdue energy bills, there is little room to maneuver indeed !

The Fund



​​The Social Security Reserve Fund was created in 2000 with the aim of investing current Social Security surpluses in order to finance future State Pension Scheme shortfalls. It was created as one of the recommendations of the tri-partite Pacto de Toledo of 1995 between government, employers and trade unions. In 2009 the fund amounted to 60 Bn€ and in 2010 assets had increased to 64 Bn€, and in 2012

​to 65 Bn€.

The Situation

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Spain has been quietly tapping the country’s richest piggy bank, the Social Security Reserve Fund, as a buyer of last resort for Spanish government bonds, raising questions about the fund’s role as guarantor of future pension payouts.

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Now the scarcely noticed borrowing spree, carried out amid a prolonged economic crisis, is about to end, because there is little left to take. At least 90% of the €65 billion ($85.7 billion) fund has been invested in increasingly risky Spanish debt, according to official figures, and the government has begun withdrawing cash for emergency payments.



Although the trend has drawn little public attention or controversy, it has become a matter of concern for the relatively few independent financial analysts who study the fund, which is used to guarantee future payments of pensions. They say the government will soon have one less recourse to finance itself as it faces another year of recession and painful austerity measures to close a big budget deficit .

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The Details



The Asset Mix Shift - Some History

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​As recent as 2007 the reserve funding for Spanish Social Securities was balanced 50/50 between Spanish and foreign debts.



​Then, the percentage of Spanish government debt held by the Social Security Reserve Fund shifted to 55% in 2008, according to official figures; by the end of 2011 it had risen to 90%. Analysts say the percentage has continued to rise, even as international agencies have lowered Spain's credit ratings as shown by the graph below...

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The Reasons



The European Commission has called on Rajoy to cut costs related to its aging population as the prime minister struggles to patch up a budget ravaged by a six-year slump. His People’s Party government is the first to have tapped the fund started in 2000 to provide Spain’s tax-funded pensions system with a safety net. It used the cash to partially compensate pensioners for inflation.



​​Spain’s pension reserve-fund ramped up its holdings of domestic debt last year, profiting from a rally across southern Europe and making it easier for Prime Minister Mariano Rajoy to raid the fund to finance his budget.



​​And it appears, since the Spanish government does not explicitly have its own Fed to monetize debt, that it has merely plundered another quasi-governmental entity to do the bond-buying reach-around. The fund, which was profitable last year on this bond-buying in its self-sustaining way, still contributes 1% to Spain's deficit as contributions to the fund are outweighed by the benefits paid.



​​In order to facilitate greater purchases of public debt by the Reserve Fund, the government changed the rules governing its investment decisions. It raised its maximum holding as a ratio of its total portfolio of any single security, for example 10-year government bonds, to 35 percent from 16 percent, and its holdings of total outstanding debt issued by the Treasury to 12 percent from 11 percent.



​​Easing of constraints by Spain’s government helped push Spanish debt leading to the nation’s government and banking system to the brink of economic collapse.

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And now, the so-called Fondo de Reserva de la Seguridad Social in 2012 increased its domestic sovereign debt holdings to 97 percent of its assets from 90 percent at the end of 2011, according to its annual report.

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More than 70% of purchases occurred in the second half of 2012, coinciding with ECB President Mario Draghi’s “whatever it takes” economic strategy to defend the euro.



​​Fund bought in 2012 20 billion euros of paper issued by Spanish Treasury, The Reserve Fund of the Spanish state pension system has decided to put virtually all of its eggs in the same basket by selling German, French and Dutch government debt for Spanish government debt.

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The Consequences

Financial Markets Consequences



​​Spain has been quietly tapping the country's richest piggy bank, the Social Security Reserve Fund, as a buyer of last resort for Spanish government bonds, raising questions about the fund's role as guarantor of future pension payouts.



​​​Spanish officials defend the heavy investment of the Social Security Reserve Fund in their government’s high-risk bonds. They say the practice is sustainable as long as Spain can continue borrowing in financial markets, and they predict the economy will start to recover late in 2013, easing the debt crisis.

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​Last year Spain's rating by Moody's and Standard & Poor's Ratings Services fell to one notch above noninvestment grade, or junk status.



So the main consequence of using the Reserve Fund to buy Spanish Debt amid the junk status has been to bring down​​ the spreads between those bonds compare to the German debt, the safest reference rate for now in Europe as shown by the chart below...

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The Fund use as a Checking Account



After the crisis began, some European countries began using the pension reserves for other contingencies, such covering a drop in foreign demand for their government bonds. Since the collapse of Ireland’s property boom, for example, most of its pension fund has been used to buy shares of nationalized banks and real estate for which no foreign buyers could be found.



“Most of the [Spanish] fund is an accounting trick,” said Javier Díaz-Giménez, an economics professor in Spain’s IESE business school. “The government is lending money to another branch of government.”



​​And in November 2012, the government withdrew €4 billion from the reserve fund to pay pensions, the second time in history it had withdrawn cash. The first time was in September, when it took €3 billion to cover unspecified treasury needs.



Together, the emergency withdrawals surpassed the legal annual limit, so the government temporarily raised the cap .



​​ ​​In addition, there are worries that Social Security reserves for paying future pensioners are running out much quicker than expected.