Spain Has EU’s Largest Deficit, Undermining Rajoy Pickup
The EU’s statistics agency Eurostat today reported Spain’s deficit widened to 10.6 percent of gross domestic product last year, ahead of Greece’s 10 percent of GDP gap, swollen by the cost of bailing out its banking system. That compares with 9.4 percent in 2011.
The Spanish premier pledged on April 17 to unveil measures this Friday to make the euro region’s fourth-largest economy more flexible and competitive. That announcement will end a week of reports ranging from an estimate of gross domestic product in the first quarter to data showing if unemployment reached another record.
Rajoy is bidding for more time from European Union 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.
“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.”
“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,” said Jose Antonio Herce, a partner at Madrid-based consultancy firm Analistas Financieros Internacionales. Excluding aid to banks the deficit was 7 percent according to the Budget Ministry.
The country “has become cheap for investors, as the probability of a European aid request is low,” he said.
The yield on Spain’s 10-year benchmark bond has dropped more than 300 basis points from a euro-era high of 7.75 percent in July, before ECB President Mario Draghi pledged to do what it would take to hold the single currency together. It was at 4.56 percent at 10:54 a.m. in Madrid.
Spain 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.
Along with economic measures, Spain’s cabinet will on April 26 approve mid-term budget plans even without receiving an update from the EU on its 2013 deficit limit, currently at 4.5 percent of GDP. That will follow Thursday’s release of labor data showing that unemployment rose to a record 26.5 percent in the first quarter, according to the median of six 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 predicted 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.
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 reescalation 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.”
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