SPAIN’S debt load is set to double from where it was when Europe’s sovereign debt crisis began, eroding the economic advantages that distinguished it from the region’s periphery and helped shield it from Greek contagion, according to the EU.
Finance chiefs met in Brussels yesterday in the latest effort to save Greece from default. Spain went into the crisis with public debt of 40 percent of its gross domestic product (GDP), compared with an average ratio of 70 percent in the euro zone.
The EU forecasts Spain’s debt will have almost doubled by next year, while Moody’s Investors Service said the country was losing one of its “key relative credit strengths”.
Investors give Spain a discount of just 30 basis points on borrowing for a decade compared with what they charge Italy, down from a 200 basis point spread at the end of last year. Spain’s 10-year yield is 5.18 percent, up 33 basis points since February 1.
“Time is working against Spain and that is why deficits have to be brought down sharply before the critical 100 percent debt-to-GDP mark is breached,” said Georg Grodzki, the global head of credit research at Legal & General Investment Management in London.
The European Commission forecasts Spain’s debt load will climb to 78 percent of GDP in 2013, compared with a euro zone average that will have swollen to 91 percent.
Spain’s indebtedness will have increased almost two-fold since 2008, while Italy’s will rise by just 13 percentage points to 119 percent, EU forecasts show.
Moody’s, which in 2001 rated Spain Aaa and Italy three steps lower at Aa3, now rates both nations at A3, four notches above junk grade.
Spain’s deficit reduction efforts are being hobbled by a relapse into its second recession in as many years. The International Monetary Fund expects the economy to contract 1.7 percent this year, preventing the nation from meeting its budget goals.
The budget deficit, which the government estimates amounted to 8 percent of GDP last year, will narrow to 6.8 percent this year and 6.3 percent in 2013, the Washington-based lender forecasts. The goal for this year agreed with the EU is 4.4 percent.
The debt load may also swell as the government offers support to lenders while it tries to clean up a banking system saddled with e175 billion (R1.78 trillion) of troubled assets linked to property.
The government planned to buy from banks bonds that converted into equity under certain conditions, it said on February 2, without saying how much it might have to spend. Madrid’s bank-rescue fund, known as the Frob, has the capacity to borrow as much as e90bn and the debt it sells counts as public borrowing.
“The problem with Spain lies with the hidden risk from the potential transfer of banks’ debt to the state’s balance sheet,” said Thomas Costerg, an economist at Standard Chartered Bank in London.
Members of Prime Minister Mariano Rajoy’s government, in power since December 21 last year, have said the nation would struggle to meet the 4.4 percent deficit target this year while the economy was shrinking. The 8 percent shortfall estimated for last year compared with the previous administration’s target of 6 percent.
A “discussion” on the goals between Spain and its European partners would start after the commission published its growth forecasts on Thursday, Economy Minister Luis de Guindos said last week.
EU economic and monetary affairs commissioner Olli Rehn urged Spain on February 14 to spell out what additional austerity steps it would take on top of the e15bn of tax increases and spending cuts announced in December.
“For now, abundant liquidity is overwhelming fundamental concerns such as deficit over-shooting, but the latter will again come into sharp focus later this year,” said Michael Derks, the chief strategist at FXPro Financial Services in London.
As three-year loans to banks by the European Central Bank underpin demand for government bonds, Spain has raised about 30 percent of its planned bond issuance for 2012, according to UBS.
Still, the Treasury paid an average of 3.332 percent to sell three-year bonds at an auction last Thursday, compared with 2.861 percent two weeks earlier, reflecting the 33 basis- point rise in yields on the existing 2015 bonds. – Bloomberg