Wednesday, September 19, 2012

Mariano Rajoy waiting for markets to force his hand

Once again Mariano Rajoy is playing a dangerous game by not officially requesting assistance. The lull in the European markets is temporary since the fundamental issues of Spain's weakening economy and distressed banking sector have not been resolved. The Eurozone and the ECB have handed Rajoy a lifeboat and Spain needs to get on fast. Waiting for yields to rise - which is what the Spanish government seems to be doing - will only cause more uncertainty and worsen an already dire situation.

Spain's labor market and housing are continuing to deteriorate, putting further pressure on the banking system. The banks are now borrowing close to €400bn from the central bank - with little hope of finding alternate sources of financing since depositors have fled the country. With things moving at "Eurozone speed", Spain's banks are yet to see any of the €100bn bailout package promised to them earlier this year.

Spain housing market index; 2005=100 (Bloomberg)


Spain's misery index hit another record as unemployment rose and taxes (VAT) pushed up inflation.

Misery index; Spain: white; EU: yellow

This morning Barclays Capital analysts downgraded their 2013 GDP projection for Spain.
Barclays: - The outlook for the Spanish economy remains very subdued and we have revised our GDP growth forecast for 2013 down accordingly from -1.4% to -1.8%, below consensus, and broadly unchanged with respect to our current growth forecast for this year. We think that given some delay in the implementation of consolidation measures in the first half of this year and a weaker economic environment, the general government deficit will once again overshoot the target (Barclays: 7.0% of GDP this year and 5.0% of GDP in 2013 vs. Government: 6.3% of GDP this year, 4.5% of GDP in 2013).

We project final domestic demand to keep contracting on a quarterly basis until Q4 next year, reflecting ongoing weaknesses in both private consumption and investment, which are likely to be impaired by severe fiscal consolidation and the corresponding fall in disposable income. We anticipate that fiscal tightening will gain momentum as the government is currently implementing additional measures following the different packages announced over the summer. The budget due to be presented on 28 September is likely to confirm this stance and should give the details of the additional measures.
Spanish regions' fiscal issues (discussed here) have not been resolved and will force the central government to take on additional debt (see discussion).
Barclays: - We believe, in fact, that the regions will be asked to step up policy implementation on the expenditure side to repair their balance sheets which (in most cases) seem to be off-track with respect to their budget deficit targets set for this year.
Clearly a number of political reasons are causing Rajoy to delay asking for ECB's assistance (discussed in this FT article). Applying now however would give Spain time to negotiate the bailout conditions versus having to do it under duress. Sadly, critical decisions in the Eurozone seem to be made only under duress. And given the economic and fiscal trajectory of Spain, it is just a matter of time before market conditions will force Rajoy's hand.
FT: - Bankers in Madrid say Mr Rajoy would be wise to apply for aid soon, when market conditions are relatively benign, rather than after sentiment turns against Spain once more and creditors will impose stiffer terms.




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