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Tension intensifies in the public debt markets
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Tension in the sovereign debt markets intensifies...
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Tensions have got worse in the European public debt markets during the last few months of 2011. Moreover, this is no longer a problem affecting basically the peripheral countries, as tension has spread to most countries in the euro area. In the case of Spain, this has led to an even higher financing cost for public debt in November, now at levels similar to those before the euro was adopted. The correction over the coming year will depend, on the one hand, on whether disturbances at a European level calm down and, on the other, whether the fiscal targets set by the stability plan are achieved.
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To date, the reforms in Italy and changes in government in both Italy and Greece have not managed to stop investors' doubts from spreading to other economies. Spain has been one of the main countries affected. Its interest rate spread for ten-year sovereign bonds came close to 500 basis points compared with similar German bonds, reaching 6.8%. Only intervention by the European Central Bank (ECB), buying up Italian and Spanish bonds, managed to temporarily ease the tension.
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...pushing financing costs for Spain's public debt up to their highest level since the euro began.
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Volatility in the secondary market has affected the debt recently issued by the Treasury. Recently auctioned 12 and 18-month bills were sold at interest rates of 5.0% and 5.2% respectively, one and a half points higher than the rates a month earlier. This increase was even greater for 10-year bonds, reaching 6.98%. Levels that have not been seen since 1997.
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The public cash deficit reaches 31.08 billion euros.
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Within this uncertain context regarding the trend in sovereign debt market tension, significant divestment can be seen on the part of foreign investors. This has been confirmed by the reduction in their portfolios of Spanish public debt. As can be seen in the graph above, debt owned by non-residents decreased by 26,762 million euros during the first eight months of the year; a phenomenon that has more than likely intensified over the last few turbulent months.
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With regards to the future, it is of the utmost importance to reduce the financing costs of public debt, particularly considering the large number of public sector bonds that mature next year, close to 120 billion euros. Otherwise, higher interest payments and the weakness of Spain's economic recovery in the first half of the year will make it difficult to adjust the high fiscal imbalances recorded to date.
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In fact, the central government's cash budget for September reveals a certain slowdown in the deficit correction. While the deficit accumulated over the first half of 2011 was 23.7% lower than in the same period a year earlier, figures up to September show a smaller adjustment of 18.1%, placing the deficit at 31.08 billion euros.
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Revenue from direct and indirect taxation decreases in September.
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The reasons for this slower rate of reduction can be found mainly in central government revenue. The application of the new financing system for the autonomous communities means that figures cannot be compared with data from 2010. Nevertheless, if we take the aggregate data for the central government and the communities, there was a significant reduction in September of 6.5% year-on-year. The decreases in revenue from Value Added Tax (VAT) and Company Tax, amounting to 298 and 775 million euros respectively, are the main causes.
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With regard to payments, we can see less spending on real public investment compared with the first nine months of 2010, offsetting the rises in spending on personnel and interest payments over the same period.
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The public deficit is therefore unlikely to fall below the target set by the stability programme, namely 4.8% of Spanish GDP. As a consequence, there will be no margin to absorb the deficit deviations expected from the rest of the organizations, mainly from the autonomous communities, unlike the situation in 2010. The new forecasts by the European Commission are along the same lines, placing the public deficit for 2011 at 6.6% of GDP, 0.6 percentage points above the government's target.
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The European Commission predicts that the public deficit will represent 6.6% of GDP in 2011.
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Should this deviation come about, tension regarding Spain's sovereign debt will remain high over the coming months. Given this possibility, it would be better if the new government chosen in November could act quickly in order to maintain investor confidence.
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