Research Dept. News
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Monthly Report, num 350 - October 2011
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Spain: overall analysis - Public sector
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Never-ending doubts in the euro area
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Spain's risk premium rises to 359 basis points in September.
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Tensions in the sovereign debt markets became more intense in the month of September. The predicted slowdown in the European economy and doubts regarding the outcome of the Greek bail-out pushed up the risk premium of the so-called peripheral countries. On this occasion, the bond purchases carried out by the European Central Bank (ECB) did not have the same calming effect as in August. In Spain, the spread between ten-year Spanish and German bonds rose by 79 basis points up to 359 towards the end of the month. In order for this spread to fall to more favourable levels, doubts must fade regarding the solvency of Greek debt and the risk of contagion.
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In fact, at a European level, the pay-out of the new tranche of aid to Greece and achievement of the targets set in Ireland and Portugal's adjustment plans would help to ease this tension. Moreover, the start-up of the European Financial Stability Facility (EFSF) over the next few months would help things get back to normal.
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At the level of Spain, doubts mainly focus on whether the Stability Programme will be achieved. According to this plan, the public sector must reduce its deficit from the figure of 11.1% of gross domestic product (GDP) posted in 2009 to 2.1% of GDP by 2014. For 2011, the target is 6.0% of GDP. Most of this reduction falls on the central government (including the state, autonomous bodies and public corporations), with a target deficit of 4.8% of GDP. The target is lower for the autonomous communities, namely 1.3% of GDP.
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The target deficit for 2011 is 6% of GDP.
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Data on the central government's actual budget situation place the cash deficit accumulated over the first seven months of the year at 20.61 billion euros, 30.6% lower than the figure recorded in the same period a year ago. This figure is in line with the government's target of 44.04 billion euros. In fact, if the current rate of shrinkage continues over the next few months, the final figure might be slightly lower.
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An analysis of aggregate cash flow for the central government and the communities shows a certain slowdown in the rate of growth in tax revenue in the first seven months of the year. This is due to the lower contribution from value added tax (VAT) which, in this period, grew by 3.8% year-on-year compared with 9.4% in the first six months. In the case of payments, the government's austerity measures reduced real estate investment by 25.3% compared with the first seven months of 2010. Public employee wages also fell, in this case by 4.2% year-on-year, although the rise in social benefits slightly raised the personnel expenditure for this period.
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The autonomous community deficit already represents 1.2% of GDP in the first six months...
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Unlike the central government, there is the risk that the autonomous communities will not manage to meet their Stability Programme. In fact, during the first six months, the deficit for these communities already represented 1.2% of the GDP forecast for 2011, only one tenth of a percentage point below the target for the whole of year. As can be seen in the graph above, there are notable differences between the various communities. Given this situation, some of them have initiated adjustment plans to sort out their public finances. Nevertheless, the deficit of the autonomous communities is likely to end up slightly above this year's target.
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These budget imbalances raise the level of the general government's gross debt to 65.2% of GDP, 4.8 percentage points above the figure for 2010. The privatization of Barcelona and Madrid's airports, as well as 30% of the National Lottery are expected to generate around 12 billion euros. This revenue will help to reduce Spain's debt by close to one percentage point, so that the government's debt target, namely 67.3% of GDP, seems achievable.
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...and runs the risk of deviating from the target set for the end of the year.
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Summing up, within a context of high uncertainty in sovereign debt markets such as the present, it's essential for investors to believe in the solvency of Spain's public accounts. Meeting the Stability Programme will help this goal to be achieved. For the moment, the data available up to July are in line with by the targets set in this programme. Only the autonomous community accounts run the risk of deviating slightly from their target. But as this deviation will be slight, it will not increase doubts regarding the country's ability to adjust its public accounts.
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