SPAIN - The goal set by the Spanish government last week to use the country’s €66bn Social Security Reserve Fund to “cover some treasury needs” remains “extremely” vague, while its use remains bound by its investment strategy, according to local consultants.

David Cienfuegos and Gregorio Gilderozas, both consultants at Towers Watson in Madrid, said the announcement made by deputy prime minister Soraya Saenz de Santamaria last week came as a surprise.

Gilderozas told IPE: “It is difficult at this stage to state precisely what the government might do with the Social Security Reserve Fund.

“We are still waiting for more clarifications to come, as no previous talks have been held between the government and pension representatives to that aim.”

The announcement made by Madrid came shortly after the province of Catalonia said it would request a €5bn credit line from the central government to refinance its debt.

In July last year, the Spanish government was already considering using the reserve fund to invest in regional bonds.

The initiative aimed to help several indebted Spanish autonomous communities, which accumulated around €155bn of debt in 2010, equivalent to 10.9% of GDP.

However, according to Cienfuegos, such a move is questionable since the reserve fund - which aims to meet the future needs of contributory benefits - currently invests 90% in public debt, with as much as 80% dedicated to Spanish national debt, limiting its room to manoeuvre.

“I have fielded so many questions about investment in regional debt in recent months,” he said. “But, if you look at the investment strategy set by the reserve fund, almost 100% of its portfolio is already invested in Spanish government bonds.

“Given this strategy, the only option Madrid would have would then be to sell its government debt to buy more regional bonds. This does not make any sense.”

Cienfuegos went on to say that the option of selling assets to invest in Catalonian bonds would be possible only if the reserve fund had a broader investment mandate, even though it would not be a savvy way of diversifying from an investment viewpoint.

One option would be to encourage local pension funds to step into this market.

“We have already seen pension plans in Spain investing in regional debt,” Cienfuegos said.

However, he also stressed that, at this point in time, Spanish pension funds have not given any clear indication that they would increase their allocation to regional bonds.