March 3, 2013 at 10:49 am #57309
In just five years Spain’s economy has gone from being globally admired to the edge of a second bailout. Many factors have contributed to this rapid and dangerous transformation but one stands out: the inability of Spanish authorities to control the public sector deficit. In 2007, Spain posted a surplus of about 2 per cent of gross domestic product. Since then the country has had deficits of more than 9 per cent for three consecutive years. The deficit for 2012 is expected to be close to 7 per cent of GDP.
Madhur Jha, a global economist at HSBC, warned on Thursday that Spain will see weaker growth this year, deficit targets will have to be eased and falling bond yields won’t guarantee debt sustainability.
“We believe that unless the consolidation targets are eased, the Spanish economy will face a deeper recession in 2013 and higher unemployment, potentially leading to growing social unrest and rising regional separatist calls,” Jha noted.
The European Commission signaled that it could ease Spain’s budget goals this week, but Jha noted: “Even if Spain’s debt targets are eased giving Spain more time to reach its consolidation goal, the debt dynamics continue to worsen for Spain over the medium term.”
“While European Central Bank (ECB) support and a few innovative government measures could keep the pressure off Spanish bond markets in 2013, the debt stock continues to rise. For debt to stabilize, growth will have to pick up sharply – unlikely in the face of more austerity, continued deleveraging in the financial sector and a staggeringly high unemployment rate,” Jha noted.
Spain’s bond market has belied the economic fundamentals, with borrowing rates seemingly stable since the ECB announced a program of Outright Monetary Transactions (OMT) in which it could buy unlimited sovereign bonds, albeit with strict conditions attached.
Jha noted that falling bond yields were certainly helpful in improving debt sustainability but that the debt burden – of 90.5 percent of GDP by the end of 2013, according to Spanish treasury – would not decline.
“Even if the ECB decides to undertake unlimited bond purchases, bond yields would have to fall to impossibly low levels really to dent the growing debt burden. Growth then remains essential for debt sustainability, but we are unlikely to see it this year.”
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