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Investors Return to Spain as Surplus Reaches Record

Spain posted its second current account surplus in the euro’s history and foreign investors increased their holdings for the first time this year, helping Prime Minister Mariano Rajoy’s campaign to resist a bailout.

The current account showed a surplus of 1.24 billion euros ($1.6 billion) in August, the Madrid-based Bank of Spain said today, compared with 500 million euros in July, when the nation showed its first surplus in the euro’s history. Foreign portfolio investment showed an inflow of 2.34 billion euros in August, the first positive reading since February 2011.

The data, which spurred gains in Spanish bonds and stocks, follows yesterday’s figures showing the central government’s deficit narrowed in September, buoyed by tax increases. Such reports may bolster Rajoy’s argument that he doesn’t need to trigger the European Central Bank’s bond-buying program by signing up to a European rescue package.

Spain’s 10-year bond yield, which rose as high as 7.75 percent before the ECB proposed buying bonds of cash-strapped nations in August, fell to 5.61 percent at 11:47 a.m. in Madrid from 5.67 percent yesterday. The Ibex-35 (IBEX) main share index rose 1 percent.

“The data has improved a lot but I wouldn’t get too excited,” Jose Carlos Diez, chief economist at Intermoney SA in Madrid. “Portfolio investment is coming in, but it depends on ECB bond-buying and rating agencies” not downgrading Spain.

Not Indispensible

Rajoy has hesitated since August on whether to trigger the bond-buying facility, and said this week it wasn’t “indispensable” even as he faces increasing pressure from investors and some European peers to do so.

Spain, whose current-account deficit swelled during its debt-fueled boom, is now relying on exports to drag the economy out of a five-year slump as its 25 percent unemployment rate weakens domestic demand. As the government seeks to reduce the nation’s dependence on foreign financing, it is implementing measures such as cuts to labor costs to make Spanish goods more competitive abroad, while raising taxes on consumption.

“A significant amount of the improvement is structural,” said Gilles Moec, co-chief euro-region economist at Deutsche Bank AG in London. “All this should put into question the whole ‘competitiveness obsession,’ whereby Spain was doomed to go through years of deflation to rebalance its current account.”

Sign of Recovery

Economy Minister Luis de Guindos, who forecasts a balanced current account this year, has repeatedly argued that in Spain’s previous crises, the return to a current-account surplus marked the start of the recovery. Spain’s “fundamental ambition” is to correct “all the imbalances that led to the current situation,” he said on Sept. 6.

Budget data yesterday showed the central government’s shortfall was 4.39 percent of gross domestic product in the nine months through September, compared with 4.77 percent in the eight months through August. Value-added tax receipts surged 11.9 percent in September from a year earlier as an increase came into effect.

“All these developments and read-outs allow us to be optimistic about reaching our budget objectives,” Deputy Budget Minister Marta Fernandez Curras told reporters in Madrid late yesterday. “The central government deficit is under control.”

Social Security

Still, the government said it would try to keep the central deficit below 4 percent of GDP, to allow the social security system to overshoot without endangering the overall targets. Rajoy is also struggling to control regional spending, which along with municipalities makes up the rest of the public-sector balance.

The government needs to raise 60 billion euros in debt and equity to fund a bad bank that it announced this week and Curras said the administration also is weighing a bailout for toll-road operators that are struggling to meet repayments on 4 billion euros of project loans.

The state already bailed out banks, the power industry, the regions and the construction industry as private sector losses tumble onto the government’s books amid the country’s worst financial crisis in more than half a century.

Spain’s economy contracted for a fifth quarter between July and September as unemployment rose to the highest on record. That adds to the burden on the social security system, which the government is planning to finance this year by raiding its pension reserves. The government had forecast the system would balance its books this year even as it increased pensions.

To contact the reporters on this story: Emma Ross-Thomas in Madrid at erossthomas@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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