A widening fiscal gap and mounting pressure from the business community and credit ratings agencies leave Spain with little or no choice but to request European aid soon, despite saying it is in no rush to make a decision, analysts and sources say.
Prime Minister Mariano Rajoy has said his government is studying strings attached to a new European Central Bank plan to bring down Madrid’s borrowing costs if it seeks assistance from the euro zone’s rescue fund. Mr. Rajoy said in a television interview on Monday he still had not made up his mind.
But a combination of budget slippage, welfare costs inflated by recession and overspending by Spain’s autonomous regions mean the government now needs to borrow €30-billion to €45-billion ($38-billion to $56-billion) in medium- and long-term paper rather than the planned €20-billion by the end of the year.
Spain, which after Greece, Ireland and Portugal has become the latest focus of a euro zone debt crisis now nearly three years old, says it can afford to take its time.
The Treasury has issued €66-billion, or 76.8 per cent, of its original medium- and long-term funding plan of €86-billion for 2012.
It has also secured European rescue funds of up to €100-billion for its troubled banks and plans to use bank loans and the national lottery to fund an €18-billion liquidity mechanism for its highly indebted regions.
The risk that financial strife in the banks and regions spills over to the central government have been at the heart of investor concerns over Spain.
Although yields on Spain’s benchmark 10-year bond reached record highs in July, the country’s average debt servicing cost is lower than in previous years at 4.7 per cent for long-term maturities, compared to a forecast of 6.4 per cent in the 2012 budget.
This, however, is only one small part of the equation and market pressure could quickly prove unsustainable, forcing Madrid to accelerate the aid request.
The Treasury has little flexibility between now and the end of the year as it must refinance €27.5-billion of debt coming due in October.
Credit rating agency Moody’s, which has Spain’s sovereign debt rated just one notch above junk grade, is due to release its next review by the end of September. Moody’s and Standard and Poor’s both said last month an aid request would be favourable for the country’s ratings, a clear signal that they would downgrade Spain if it failed to make an application.
Business leaders, wary that a sovereign downgrade to junk would trigger further ratings cuts for Spain’s top companies, which are already struggling to cut mountains of debt, are pressing the government to move forward with the request.
“(A downgrade) would be devastating for companies and that’s perhaps the biggest concern now for the government,” said one Spanish official, speaking on condition of anonymity.
Arturo Fernandez, a leader of the CEOE business association said last week time was running out, although some executives of big Spanish multinationals fear the stigma of an aid request.
The Treasury is rapidly losing firepower as its liquidity buffer diminished to €23-billion in July from €40-billion in May, according to data from the Bank of Spain.
Analysts from Banesto believe it fell further in August to reach a worrying €12-billion, in line with the estimate of another senior analyst, Nick Kotsonis, who put the buffer at €13-billion.
“I think it is a done deal that Spain will seek assistance. They didn’t raise nearly enough money in the markets in August and in fact I would argue that they are not even trying to avoid assistance at this point,” said Mr. Kotsonis, senior fixed income analyst at the Ohio Public Employees Retirement System.
Banesto said it was “only a matter of time” before Spain made a request.
Perhaps even more worrying is the fiscal gap Spain is set to register at the end of the year despite €14-billion of fresh spending cuts and tax hikes for 2012 announced in July.
A higher-than-expected rise in consumer prices will cost an extra €4-billion for a one-time inflation adjustment to state pensions. Spending on unemployment benefits increased by 5 per cent this year when the government had expected them to fall by 5 per cent, creating another €3-billion budget hole.
And a tax amnesty meant to raise €2.5-billion by November had only attracted €50-million at the end of July, according to budget ministry figures.
The gap could widen more as further slippages – €1-billion for every decimal point in the deficit – are likely to materialize after Spain reported a central government deficit of 4.6 per cent of GDP from January to July, already above the 4.5 per cent full-year target.
The government says the central government deficit will fall in coming months, leaving it on track to meet the objective, as the figure takes into account transfers to indebted regions which are also a major source of concern for financial markets as their fiscal performance remains unclear.
Jose Ignacio Conde-Ruiz, economist and deputy director of the FEDEA think-tank in Madrid, sees the autonomous regions overshooting their joint deficit target of 1.5 per cent of GDP and reaching 2.2 per cent under his most optimistic scenario.
A source familiar with government thinking said the overall public deficit could go as high as 8 per cent of GDP, creating an additional funding shortfall of about €15-billion.
Adding up all the elements of the funding gap, the final funding figure in medium– and long-term paper which would have to be issued by the end of the year comes to €30-billion – or 45 billion if the deficit climbs to 8 per cent – rather than the €20-billion under the current program.
An economy ministry spokeswoman said the Treasury would stick to its funding program, which will enable Spain to meet its financial obligations until the end of the year. “New measures have been taken in July and we believe that there is no need to alter our program to meet our obligations,” she said.
Spain could issue more short-term paper to take advantage of improved funding conditions after the ECB bond-buying plan was announced last week, but its issuance calendar on short-term maturities already looks busy, with €35-billion still to come in 2012.
An emphasis on shorter-dated debt would also store up future problems as it would add to an already very challenging funding program over the next three year, with debt repayments of €122-billion due in 2013, €83-billion in 2014 and €70-billion in 2015, well above the €57-billion Spain faced in 2012.