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Spain’s Swelling Debt Seen Impeding Rajoy Deficit Battle

March 25, 2013

Spain’s Swelling Debt Seen Impeding Rajoy in Battle on Deficit

An employee positions a scrapped vehicle chassis using a front-loader in the yard of the Desguaces La Torre scrapyard in Madrid. Spain's total public debt jumped 20 percent last year to reach 84.1 percent of output as the government bailed out the nation's banks, its municipalities and its pensions and jobless-benefit systems. Photographer: Angel Navarrete/Bloomberg

Prime Minister Mariano Rajoy’s progress in curbing a deficit worsened by the cost of servicing Spain’s swelling debt load will be revealed this week with the release of data on the country’s finances.

The Budget Ministry will tomorrow publish figures for February showing the central government’s budget shortfall, which accounted for more than half of the nation’s deficit in 2012. Data in the following days on mortgage loans, inflation and retail sales will also highlight the plight of the taxpayers financing those outlays.

Rajoy last week signaled the difficulty of his task in taming a deficit as he backtracked for the first time on his pledge to haul Spain out of a six-year slump later this year. He said the euro region’s fourth-largest economy may face a worse recession than the 0.5 percent contraction he’d previously predicted for 2013.

“The increase in government debt is causing the interest- rate burden to take a bigger toll on tax revenues,” said Ricardo Santos, an economist at BNP Paribas SA in London. “Spain needs to do more in terms of structural tightening, not only this year, but also in 2014 and this will imply a significant drag on growth.”

Yield Slides

The yield on Spain’s 10-year benchmark bond fell four basis points to 4.813 percent at 11:28 a.m. in Madrid, narrowing the spread with similar German maturities to 3.42 percentage points, after euro-region finance chiefs clinched a new deal early today in Brussels to avoid a disorderly default in Cyprus. It replaced a week-old plan that rattled markets by taxing all depositors. The yield on 10-year Spanish bonds rose as high as 7.75 percent last July before the European Central Bank pledged support to hold the single currency together.

In January, the central government’s deficit rose 35 percent from a year earlier to 1.2 percent of gross domestic product as interest costs surged 11 percent. Spain’s total public debt jumped 20 percent last year to reach 84.1 percent of output as the government bailed out the nation’s banks, its municipalities and its pensions and jobless-benefit systems.

“There is no great scenario: allowing Spain a fiscal breather this year is the least worst one,” said Gilles Moec, co-chief European economist at Deutsche Bank AG in London. “On one hand, the lagging impact of fiscal measures in previous years continues to be a drag. On the other, if you get into additional austerity now, you’ll get lower growth, you’ll get social tension.”

More Time

Rajoy is requesting more time from euro-area peers to tackle the region’s second-largest budget gap. The government reduced the deficit by a quarter to 6.7 percent of GDP last year, excluding European aid to the banking industry.

“The earlier we get new targets, the earlier we’ll all be set,” Budget Minister Cristobal Montoro, who is due to submit budget plans through 2014 in April, said last week. The current limits set by the European Union are 4.5 percent of GDP for 2013 and 2.8 percent for 2014.

While exports rose for the first time in three months in January, economists forecast domestic demand will drop more sharply this year as a 26 percent unemployment rate threatens to keep increasing and labor costs fall.

‘Vicious Circle’

The National Statistics Institute, or INE, releases data for January mortgage lending tomorrow and February retail sales on March 27, both of which have declined from a year earlier in every month since at least 2010. Other data on March 27 will show Spanish inflation slowed in March, according to the median of 11 estimates in a Bloomberg News survey.

Bad loans as a proportion of lending at Spanish banks resumed their increase in January as the country’s economy continued to suffer from the aftermath of the end of a real- estate boom in 2008.

“There is a vicious circle in the sense that Spain’s initial problem lies in the situation of its banks that need to be recapitalized once and for all,” Deutsche Bank’s Moec said. “European loans to recapitalize the banks have added to the sovereign’s liabilities without providing complete insurance that the balance sheets are fully cleaned up.”

While Spain’s real-estate bust continues to burden its economy, Britain’s housing market is showing resilience. Home values there rose the most in three years this month, led by a surge in London, as demand outstripped supply, according to Hometrack Ltd. Average values in England and Wales increased 0.3 percent, the biggest advance since March 2010.

Later today, the Federal Reserve Bank of Chicago and its Dallas counterpart will release economic indicators.

Investor Concern

The ECB’s support and a hunt for yields has so far abated investor concern on Spanish debt. The Treasury has covered about 31 percent of its planned mid- and long-term debt issuance for 2013, the highest since 2005, according to UBS AG, in less than three months.

“The Spanish debt stock is going to continue to increase for at least the next few years with more deficits to come,” said Robert Wood, an economist at Berenberg Bank in London. “Imposing fiscal austerity hurts growth and means the fiscal balance doesn’t get corrected as much as first intended, but tax receipts aren’t permanently destroyed, they return when you exit the recession.”

To contact the reporter on this story: Angeline Benoit in Madrid at abenoit4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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