Give Spain fair targets, or damn the euro

Another really bad day for Spain. Moody’s reduced to junk status debt issued by several regional governments while the European Union statistical office revised its 2011 deficit dragging it to the same level as Greece.

The credit agency move was triggered by the dim outlook these regions face, with no money in their coffers to pay for the large chunks of securities maturing till the year close. Central government finances will be further stretched in coming to rescue to avoid utter discomfiture.

The huge 2011 deficit, now ranking at 9.4% GDP, makes meeting the fiscal goal for this year an improbable feat. The more so as only a balanced budget from mid-year could compensate the large deviation that has already eaten up the whole 2012 target. Shrinking the hole by GDP 3 percentage points in just a couple of months seems out of reach.

Asking for a rescue package right now entails the non-negligible danger to largely miss the fiscal condition even before it gets the money. A daunting prospect should the European Central Bank withdraw from intervention following its plan. As that would lead the Euro zone spinning out of control, conditions imposed on Spain should be tailored to be fairly met. That inevitably involves further flexibility in its deficit goals, following the November economic perspectives to be published by the Commission. That would lead to the plausible scenario of a rescue call a few weeks later taking next year as a reference for deficit conditionality. Thus Spain would be allowed some breathing space to redress its badly mauled public finances.

The question mark is whether markets will grant any respite at all. Risk premium hike is already showing that the honeymoon the robust ECB plan brought about is fading away.

As hopes for early implementation of the bold June agreements have evaporated following the lacklustre recent European Council performance, troubled countries are confronted again with the same old problems. The growing German reluctance to provide help to its ailing neighbours doesn’t warrant the massive debt twin intervention by the ESM and the ECB taking place under the assumptions it was conceived. In other words, it offers scant hope that soft landing will inspire future rescues.

Having failed to ask for help when the outlook seemed more favourable, Madrid has no alternative to the wait-and-see strategy.

Handicapped by a substantial fiscal deviation and bleak production prospects, it has to convince creditors to refrain from an austerity diet throttling its slim growth perspectives as the best way to secure they are paid back in future. No easy task at all.