Both issues are worrying Brussels. In terms of public finances, the last data of budgetary implementation of July leave very little room for manoeuvre to meet the deficit target, except if new (and hard) spending cuts take place in the last months of the year. As for the bank bailout, in Europe it is not understood how Madrid can miss the opportunity of having a €60-billion-cushion, money that remains from the 100 billion approved in the financial assistance program.
Brussels thinks both decisions are linked. If Spain shows in November with reliable data that it has not deviated from the targets, the country won’t need any further financial assistance or additional measures. And there is no doubt that Madrid will do its best to balance its numbers and avoid the stigma of a new rescue.
It won’t be easy, though. Public deficit reached 5.27% in July versus the 6.5% target set for the whole of the year. The budgetary implementation of the last months of the year is usually very complicated and, contrary to what happened in 2012, there doesn’t seem to be any room for new tax rises, or further fiscal amnesties, or even to eliminate civil servants’ Christmas pay, unless the President breaks his commitment.
Therefore, there aren’t many alternatives: either revenue soars well above the forecasts until the end of the year, or new spending cuts will be necessary, especially at a regional level, since autonomous regions are in the biggest trouble.
Despite everything, there’s some room for optimism. The risk premium Spanish continues to fall and is extending its differential with the Italian. European Commissioner Olli Rehn said that the risk is now in Italy, and Morgan Stanley recommends buying 10-year Spanish government bonds in a report entitled Viva España!