Research Dept. News
|
|
|
|
Monthly Report, num 353 - January 2012
|
|
|
Spain: overall analysis - Public sector
|
|
|
|
|
2012: new measures to exit the debt crisis
|
|
New agreements reached at the European summit to tackle Europe's crisis.
|
|
The euro symbol (?) takes its inspiration from the initial of «Europe» and the letter epsilon from the Greek alphabet, in reference to what was the cradle of European civilisation. The two parallel lines crossing it represent the currency's stability. Paradoxically, it was Greece where the turbulence started that would end up infecting the rest of Europe's public debt markets, raising doubts as to whether the single currency will continue. Given this threat, the agreements reached at the European summit last December laid the foundations to overcome the sovereign debt crisis. Without doubt, the future implementation of what is, today, merely a rough draft, and the credibility of Spain's fiscal consolidation will determine the pressure on our public finances. All this within a context of a stagnant economy.
|
|
|
|
The measures agreed by most European Union (EU) states, with the exception of the United Kingdom, indicate their readiness to give up fiscal sovereignty. It was agreed to establish a stricter limit on public budgets, whose structural deficit (having discounted the effects of the economic cycle) cannot exceed 0.5% of their gross domestic product (GDP). Greater fiscal discipline can also be seen in the tougher corrective measures when a country's deficit goes over 3% of GDP and the capacity of the European Commission to supervise budget plans. The commencement of the European Stability Mechanism (ESM) has also been brought forward by one year to July 2012, albeit without increasing its allocation of 500 billion euros. To this amount we should add the 200 billion euros to be provided by the EU to the International Monetary Fund (IMF) so that it can be lent to countries in difficulty.
|
|
|
|
These agreements represent a small step forward in the right direction. However, their slow implementation and a delay in their results until the medium term might prolong uncertainty in the markets, especially given the expectations of a slowdown in Europe's economy in 2012.
|
|
|
|
In this situation, the spread in yields from Spain's 10-year bonds compared with their German peers, known as the risk premium, fell by half a percentage point after the summit was held, down to 325 basis points (b.p.). This figure is far from the peak reached mid-November, when it exceeded 500 b.p. As a result, the 12 and 18-month bonds issued in December were placed at a cost that was one percentage point lower than the previous month, with demand outstripping supply by more than three to one.
|
|
Spain's risk premium falls to 325 basis points.
|
|
In spite of this improvement, Spain's risk premium ended 2011 at a significantly higher level than the 250 points recorded at the start of the year. The country's huge need for financing in 2012, estimated at more than 160 billion euros, means that the trend in its financing costs is of prime importance. These costs will depend on various factors, particularly the solidity of Spain's fiscal consolidation and the direction of its economic growth.
|
|
The country's financing needs for this year are estimated at more than 160 billion euros.
|
|
With regard to fiscal adjustment, we estimate that the public sector deficit exceeded the target established of 6.0% of GDP in 2011 by more than one percentage point. The data available point towards budget deviations in the autonomous communities and Social Security as the main reasons. In effect, the deficit accumulated by the former between January and September was equivalent to 1.2% of GDP in 2011. This figure is one tenth of a percentage point below the limit set for the whole year. The reduction in costs of around 30 billion euros compared with the same period the year before was not enough to offset the fall in revenue of a similar amount. Given that the fourth quarter is usually accompanied by high expenditure obligations, we estimate that the total deficit will have exceeded 1.5% of GDP in 2011.
|
|
The deficit of the autonomous communities reaches 1.2% of GDP in 2011 in the third quarter.
|
|
Similarly, during the first eleven months of the year, the Social Security offices cut their surplus by 41.8% year-on-year, down to 5.6 billion euros. The deterioration in employment and therefore in Social Security contributions in the last part of 2011 might have even placed the budget balance at the end of the year in the red, far from the 3.9 billion euros predicted by the government.
|
|
|
|
Neither did the weakness of economic activity help the country's deficit to fall more than the nine tenths of a percentage point predicted by the government, reaching 4.8% of GDP. Up to November, the budget imbalance, in national accounts terms, adjusted by 4.9% year-on-year, standing slightly above the target. Although the new financing system implemented in 2011 means that a full comparison cannot be made with the previous year, cash flows help us to make out the main forces underlying this improvement. In the case of central government payments, the main ways of adjusting public spending are real estate investment and current expenditure on goods and services. With regard to revenue, an analysis of the aggregate data for the central government and regional administrations reveals that tax revenue has remained practically at a standstill compared with the first ten months of 2010.
|
|
The country's deficit accumulated up to October 2011 falls by 16.9% year-on-year, in line with the target figure of 4.8% of GDP.
|
|
As a consequence, the lower than expected correction in the public deficit in 2011, the economy's weak pulse and the growing burden of interest repayments will require a greater effort to achieve the deficit targets for 2012. In this respect, in his investiture speech the new president of the government, Mariano Rajoy, threshed out a route map marked by austerity and budget discipline. Among the main measures, of particular note are the simplification of agencies and other public organizations, cuts in current expenditure for central government administration and the non-replacement of civil servants.
|
|
|
You can susbcribe now to be nofified by email every time the Monthly Report is updated in the internet.
|
All documents are in Adobe Acrobat format (PDF).
To view a document in PDF format you need the Adobe Acrobat Reader. If you don’t have it already loaded on your computer, you can donwload it now.
|
|
Direct link to the Research Dept. in your mobile
We'll send you a free SMS with the link
|
