LONDON/MADRID | Ratings agency Standard & Poor's had already added an injection of €80 billion to €120 billion of public money into the banking sector when it downgraded Spain last April 26 to BBB+ with negative outlook. The agency stated this week that even using the total amount of €100 billion, the country's debt per GDP ratio would be 76.6 percent in 2014. S&P said there would be no further revisions.
The S&P note would confirm that Spain will keep its current investment grade and will be able to place its sovereign bonds as collateral with the European Central Bank. The agency's analysis comes to support a recent Barclays report, according to which Spain's public debt is sustainable whether the deficit targets are met or not.
In fact, regional fiscal data in Spain showed some positive signs of fiscal consolidation. In the first quarter of this year (national accounts basis) the deficit of the regions was zero, although after adjusting for the transfers of the central government to the regions that have taken place in January to March, instead of mid-year as in 2011, the deficit of the regions was 0.45% of GDP. So, there has been some mild and harmless creative maths along the way.
Because even leaving aside the advances, comparing like-for-like with the first quarter 2011 deficit, which reached 0.75% of GDP, the performance in 2012 seems encouraging, Barclays analysts explained in their investor report. This is particularly so as not all the regions had a formally approved budget.
Regional budgets had only been approved by the central government on May 17 at the Council of Fiscal and Financial Policies (ie, where the central government meets regularly with the finance ministers of the regions). The budget execution of the regions also helps to explain why the central government data through April 2012 reached nearly 2.4% of GDP, in part as a result of the transfers to the regions, as well as the advanced returns for several taxes to households. When correcting for these two effects, the deficit of the central government was 1.4% of GDP.
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Are these fiscal data consistent with the year-end targets?
“It is too early to say whether the budget execution thus far is on track with the year-end target of an overall deficit of 5.3% of GDP (ie, for the regions, the target is a deficit of 1.5% of GDP; for the central government, the target is 3.5% of GDP).
“Nonetheless, we can say that the budget data thus far do not show any large deviations that would make the 2012 target evidently unachievable (nor evidently within reach).”
For Barclays, those targets are unnecessarily and overly ambitious, and it is unlikely that with the existing fiscal measures can be met. More specifically for Spain, experts pointed out, it is reasonable to assume that a 1% fiscal consolidation only produces an effective deficit reduction of 0.7%. With the current fiscal plans, this means that the overall deficit is likely to be about 6.2% of GDP (instead of 5.3%).
The difference between Barclays estimates and those of the Spanish government lies in the fact that at Barclays they are assuming a larger GDP contraction than the government (Barclays: -2.0%; Spanish government: -1.7%), and also a slightly less fiscal adjustment in 2012 than the government.
In any case
“Overall, Spain does not need to achieve the current fast-paced fiscal consolidation plan to ensure solvency. In fact, Spain needs a fiscal swing of about 8% of GDP over the next 5-6 years to achieve a primary surplus of about 2% of GDP by 2016, in order to put the public debt on a clear downward-sloping path.
“Our deficit estimate for 2012 (and the medium-term fiscal plan) appears consistent with this path. Interestingly, the European Commission has indicated that they are willing to relax the 2012-13 fiscal target for Spain.”
