27th September 2012
This improvement in conditions did allow some Spanish companies and banks to obtain some relief by issuing debt themselves into a calmer and lower yielding market. But apart from that there was no change in the downwards trajectory of the Spanish economy itself. So we have been seeing another divorce between the financial and real economy and a much wider divorce between the new calm in bond markets and the recent riots on the streets of Madrid.
Spain's government continues to have budget problems
However this week has seen news from the Spanish Comptroller that her fiscal deficit plan is going awry. Via Google Translate here are the numbers for her central government and social security system:
Until the end of August 2012 the need for state funding, deficit in terms of accounting national, has been of 50,132 million, up by 9.634 million on the number recorded at the end of the same period 2011. In terms of estimated GDP, the government deficit is equivalent to 4.77% of such magnitude, which is a increase of 0.96 points compared to August 2011, when the deficit accounted for 3.81% of GDP.
If we recall that Spain is supposed to be in a period of severe austerity we see yet another application for my financial lexicon as we see a deficit rising rather than falling as it was supposed too. We do get a partial explanation of why this might be:
mainly due to the advancement of state transfers to the rest of the government and the European Union as well as the increase in interest on the debt.
So we get a reminder of the issues with overspending by the regional government's in Spain and the fact that over 2012 as a whole the cost of debt issuance has risen. Indeed at the current level of 4.77% of GDP it is already over the 4.5% target for the year as a whole for this section of the budget (other sections are added in to get to the total number such as 1.5% for the regional governments and the overall target of 6.3% of GDP for that).
However at this point I would like to remind you that the overall 2011 fiscal deficit in Spain turned out to be 8.5% in 2011 and so far in 2012 it is running at a higher level. This is why there have been suggestions in the newspaper El Pais that the total budget deficit could be heading for 10% of GDP this year. So way above target and higher than last year.
It was not supposed to be this way
I would like to take the advice of Kylie Minogue and "Step Back In Time" to the European Commissions Stability Programme 2011-14 for Spain. Firstly we now see something troubling in this bit.
One of the most adverse results of the crisis in Spain has been the deterioration of public finances, which placed the deficit at 11.1% of GDP in 2009.
So we see that the "adverse results" are in danger of coming back to Spain. This is a slap in the face for the European Commission and its Stability Programme because it promised us this going forwards.
the Government decided to accelerate fiscal consolidation plans in May 2010.
These plans were supposed to give this result:
Thus, the target of the Spanish fiscal consolidation strategy is to achieve a deficit of 3% of GDP in 2013 and 2.1% in 2014. To do this, the intermediate budget targets are: a deficit of 9.3% of GDP in 2010, 6% in 2011 and 4.4% in 2012. The Programme establishes an annual fiscal effort in excess of 1.5% of GDP on average until 2013, more intense in 2011.
There has been a very large gap between these forecasts (fantasies?) and how things have turned out. We are back to the issue of over-optimistic economic growth forecasts with the quote below is at the heart of:
domestic demand is expected to stabilize in 2011 and generate a positive contribution of 1.3 points to growth by 2012.
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