Bloomberg News

Spain Has EU’s Largest Deficit, Undermining Rajoy Pickup

April 22, 2013

Spain Slump With Record Jobless Pressures Rajoy Pickup Wish

A pedestrian passes the bricked up windows of a closed store in Madrid. The Spanish economy is suffering from a persisting credit drought. Photographer: Angel Navarrete/Bloomberg

Spain’s budget deficit was the largest in the European Union last year, underlining the challenge faced by Prime Minister Mariano Rajoy as he prepares a new plan to foster an economic recovery.

Eurostat, the EU’s statistics agency in Luxembourg, today reported that Spain’s 2012 deficit widened to 10.6 percent of gross domestic product, swollen by the cost of bailing out its banking system. That’s up from 9.4 percent in 2011 and is worse than Greece’s 2012 budget gap of 10 percent. A limit of 3 percent of GDP is imposed by the EU on all members.

Rajoy pledged last week to unveil measures on April 26 to make the euro region’s fourth-largest economy more flexible and competitive. That announcement will end a week of reports ranging from a first-quarter GDP estimate to data showing whether unemployment has reached another record.

European stocks today rebounded from the biggest weekly drop in five months as Italy elected a president and the Group of 20 nations offered no opposition to Japan’s stimulus policies. The Stoxx Europe 600 Index (SXXP) was up 0.9 percent at 11:48 a.m. in London. The euro was down 0.1 percent at $1.3041.

Rajoy is bidding for more time from EU peers to reorder public finances as he aims to end a six-year economic crisis, aided by the European Central Bank’s pledge to do whatever it takes to preserve the euro. International Monetary Fund Managing Director Christine Lagarde said last week that the Spanish government needs more time to reduce its deficit.

Structural Improvement

“Spain needs another two to three quarters to fully reassure investors,” said Gilles Moec, co-chief European economist at Deutsche Bank AG in London. “Beyond the ECB’s support, it must prove the economy’s improvement is structural and that the bank recapitalization is sufficient to deal with the increase in non-performing loans.”

The country’s shortfall grew while the euro area’s combined deficit narrowed to 3.7 percent of GDP from 4.2 percent a year earlier. Germany had a budget surplus last year, while Italy was within the EU limit at 3 percent and France and Ireland reduced their gaps to 4.8 percent and 7.6 percent respectively. Greece’s deficit widened from 9.5 percent in 2011.

Spain’s overall debt load surged to 84.2 percent of GDP from 69.3 percent. While that’s still below the euro region’s average of 90.6 percent, the European Commission forecasts it will breach the average this year.

‘Cheap’ Investment

The Spanish Treasury last week sold 10-year bonds at the lowest yield since 2010, completing 43 percent of mid- and long- term funding needs for 2013. Still, investors demand about 3.4 percentage points more than to lend to Germany for the same maturity.

“Spain has become cheap for investors, as the probability of a European aid request is low,” said Jose Antonio Herce, a partner at Madrid-based consultancy firm Analistas Financieros Internacionales. “There is still a lot to do but over the past year the government has succeeded in stabilizing the banking system and reducing the deficit.”

Excluding aid to banks, the 2012 budget deficit was 7 percent, according to the Budget Ministry.

Along with economic measures, Spain’s cabinet will on April 26 formally sign off on mid-term budget plans even without receiving an update from the EU on its 2013 deficit limit for the country, currently at 4.5 percent of GDP.

Shrinking Economy

That will follow the release of labor data on April 25 showing that unemployment rose to a record 26.5 percent in the first quarter, according to the median of eight estimates in a Bloomberg News survey of economists.

Rajoy has signaled that the economy will probably shrink this year by more than the 0.5 percent he previously forecast.

The Bank of Spain, which predicts a 1.5 percent contraction in 2013, will this week publish its GDP estimate for the first three months of the year. Economists forecast a drop of 0.5 percent and the seventh quarter of recession. The economy shrank 0.8 percent in the final three months of last year, the most since 2009.

Inditex SA (ITX), the world’s biggest clothing retailer, missed analysts’ profit estimates in the last quarter of its fiscal year as the toughest austerity in 30 years of democracy undermined its home market.

Credit Drought

The Spanish economy is suffering from a persisting credit drought. Mortgage data to be released on April 24 may confirm that banks continued to restrict credit in February after bad loans amounted to 10.4 percent of total lending that month. Banks’ asset quality is vulnerable as the weakness of euro-area economies including Spain affects as much as 20 percent of non- bank corporate debt, the IMF last week said in a report.

“Indicators are still pointing to the continuation of a pretty deep recession,” said Jonathan Loynes, an economist at Capital Economics Ltd. in London. “If we see a re-escalation of the euro-zone crisis -- whether due to the Cyprus episode or Italy’s political deadlock -- that could push borrowing costs up across the region, and Spain would clearly be affected.”

Rajoy will seek to convince investors that such a scenario can be avoided as he continues to overhaul the economy after claiming measures to overhaul labor rules improved competitiveness and helped drive exports to a record.

His plans now include tax changes to help entrepreneurs, a reorganization of the public administration to make the pensions system sustainable and regulation changes for energy, telecommunications and transportation.

“Spain doesn’t look altogether different from the U.K. or France,” said Robert Wood, an economist at Berenberg Bank in London. “Of course with debt heading up towards 100 percent of GDP, big deficits and the economy contracting, bond yields are bound to be higher than in Germany, but rising up to 7 percent wasn’t warranted.”

To contact the reporters on this story: Angeline Benoit in Madrid at abenoit4@bloomberg.net; Ben Sills in Madrid at bsills@bloomberg.net

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


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