Spain May Dodge Label of ‘Basket Case’ on Deficit Track Record
February 08, 2010, 11:59 PM ESTBy Emma Ross-Thomas
Feb. 9 (Bloomberg) -- Spain is relying on history to convince investors it will find an escape route from Europe’s fiscal crisis faster than Greece.
As investors start to question Spain’s ability to cut the euro region’s third-largest budget deficit, Deputy Finance Minister Jose Manuel Campa yesterday reminded them that “we have done it in the past.” In the early 2000s, Spain turned a shortfall into a surplus within six years of joining the euro. When Greece squeezed into the bloc in 2001, the country immediately let its deficit swell back beyond EU limits.
“We don’t think they’re AAA by any means, but they’re certainly not the basket case that you’ve seen in the case of Greece,” said Harvinder Sian, a bond strategist at Royal Bank of Scotland Group Plc in London. “The fact they have demonstrated the ability to reform in the past is a positive and one of the reasons you can’t really take the Spanish issues too far.”
Spain is getting sucked into a market selloff that started in Greece in November and has since spread across the southern edge of the euro region. Credit-default swaps on Spain rose to a record yesterday and the spread between the country’s 10-year government bond and its German counterpart increased to the most in almost a year. Standard & Poor’s last year cut its outlook on Spain’s AA+ credit rating to negative.
Investors are selling Spanish assets even after Prime Minister Jose Luis Rodriguez Zapatero’s government published a 50 billion-euro ($69 billion) cost-cutting plan to help patch up the deficit and return it to the EU’s limit of 3 percent of gross domestic product.
Discipline
“Look at the history,” Campa, a former Stern School of Business professor, told Bloomberg Television in an interview yesterday. “We have done it in the past, which proves our commitment, the quality of our public finances, and the success of our fiscal discipline,” he said yesterday in London.
Spain, which had a shortfall of 6.5 percent of GDP in 1995, cut its deficit in the run up to joining the euro in 1999 and kept it close to balance before reporting a surplus in 2005, which it held on to through 2007. By contrast, Greece’s deficit had widened to 7.5 percent within three years of joining the euro.
Spain’s debt burden, at 54 percent of GDP last year is the lowest among large western European economies and compares with a euro region average of almost 80 percent, according to data from the European Commission. Greece’s debt burden is about double Spain’s as a proportion of the economy.
Track Record
“Spain has lived with very significant public savings plans before,” said Ivan Comerma, who helps manage around 3 billion euros of assets at Banc Internacional-Banca Mora in Andorra. “Unfortunately the global economic context is not going to help, so it will take longer.”
European officials have nevertheless turned their fire on Spain. Monetary Affairs Commissioner Joaquin Almunia on Feb. 3 grouped it with Greece and Portugal in saying they had all suffered a “permanent” loss of competitiveness. European Central Bank President Jean-Claude Trichet told all countries with excessive deficits to rein in their shortfalls last week.
Spain’s budget deficit, at 11.4 percent last year trailed only Greece and Ireland.
Spain has been in a similar position before. Following a banking crisis and recession, the deficit swelled to 7 percent in 1993, prompting then Finance Minister Pedro Solbes to cut spending and increase taxes.
Debt Rising
The debt burden, which stood at 63 percent in 1995, fell to 43 percent a decade later, when Spain posted its first budget surplus since the country returned to democracy in 1978.
Still, the government may be banking on more growth than is realistic. Its deficit-reduction plan forecasts GDP growth of 3.1 percent in 2013, compared with a projection from the International Monetary Fund of 1.7 percent.
Spain’s achievement in wiping out its deficit also rested on a construction-led boom that fueled average economic growth of 4 percent per year over the previous decade.
“In those years even I would have created a surplus,” said Juan Rubio-Ramirez, a professor at Duke University and a visiting scholar at the Federal Reserve Bank of Atlanta. “It was easy to make a surplus, the difficult question is why we weren’t posting 3 percent surpluses.”
Campa said yesterday further steps would be taken if growth missed the government’s forecast. Finance Minister Elena Salgado has pledged to cut the deficit to 3 percent by 2013 and announced last month 50 billion euros in spending cuts.
Pension Plan
The government wants to raise the retirement age to 67 from 65, although the measure, and a complementary proposal to increase the number of years used to calculate pensions, must be discussed with other parties. The government projects the deficit to fall to 9.8 percent of GDP this year, 7.5 percent in 2011 and 5.3 percent in 2012.
“It’s realistic yes, it depends on political will, and it does need strong political will,” said Ciaran O’Hagan, a fixed income strategist at Societe Generale in Paris.
--With assistance from Svenja O’Donnell and Matthew Brown in London. Editors: John Fraher, Andrew Davis
To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net
To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net
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