Spain Expects a Wider Budget Gap

Oct 01, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MADRID—The Spanish government said the effort to clean up an ailing banking system will widen its budget gap and increase its debt load.

The admission comes as concerns mount over the country’s solvency, sending its borrowing costs soaring and pushing the government of Prime Minister Mariano Rajoy closer to requesting European Union aid to help it finance itself.

The euro zone’s fourth-largest economy is grappling with the collapse of a decadelong housing boom that sent tax revenue plummeting, cratered domestic demand and saddled banks with billion of euros of bad debts.

In its 2013 budget plan presented to Parliament on Saturday, the government said that the bank aid will inflate its budget deficit to around 7.4% of gross domestic product this year, which is above the deficit target of 6.3% of GDP for 2012 it has committed to with the European Union. Spain said that if the effect of measures to help banks are excluded, it would meet its EU commitment. A spokesman for the European Commission, the EU’s executive arm, couldn’t immediately be reached for comment.

Meanwhile, the Spanish government again raised its estimate of last year’s budget deficit to 9.44% of GDP from the previously reported 8.96% of GDP, to take into account measures to help its banks. It is the second time the government restated the 2011 budget deficit.

The budget revisions come as Mr. Rajoy faces mounting social and political backlash against his austerity and economic-reform measures. On Saturday, thousands of demonstrators descended on the national Parliament in Madrid for the third time in the past week to protest against spending cuts and tax increases.

 The government already has asked the EU for as much as €100 billion ($128.58 billion) in help to shore up its banks. But after an independent audit by U.S. consultancy Oliver Wyman showed the banks need just under €54 billion in fresh capital, the government said on Friday it may need only about €40 billion of the EU funds because a new state-owned "bad bank" will reduce capital needs and some of the banks will be able to raise funds on their own.

 The board of Banco Popular Español SA, the largest listed bank found to be in need of capital, on Sunday approved a plan to sell as much as €2.5 billion of new shares to investors to avoid having to take EU aid, said a person familiar with the situation. Banco Popular needs €3.2 billion in additional capital, the audit found.

The government also said in its budget presentation that its debt load will jump this year and next. Spain’s debt-to-GDP ratio will rise to 85.3% in 2012 and to 90.5% in 2013. Earlier this year, the government forecast a debt-to-GDP ratio of around 80% for this year.

In its 2013 budget plan, the government said the sharp debt increase takes into account the EU credit line for the country’s banks, Spain’s contribution to bailouts for other euro-zone countries and the financing of subsidized electricity tariffs.

The 27 countries of the EU had an average debt-to-GDP ratio of 83% at the end of the first quarter of 2012.

Spain had held hopes that the debt burden of its EU banking aid could be shifted to the region’s bailout fund after a June agreement by European heads of state seemed to open the door to doing so. But a statement last week from the finance ministers of Germany, Netherlands and Finland seemed to throw cold water on that idea by suggesting that possibility shouldn’t be open to existing bailouts, like Spain’s.

Spain’s austerity budget for 2013 includes tax increases and spending cuts worth €13 billion by the central government. Including previously announced measures and cuts to be implemented by regional and municipal governments, Spain aims to slash its budget deficit by €37 billion next year. Even so, many analysts believe a deep economic recession will make it difficult for Spain to meet its EU commitments to reduce the deficit to 4.5% of GDP in 2013 and to 2.8% in 2014. Speaking at a campaign event ahead of regional elections Oct. 21 in the Basque Country, Mr. Rajoy said Saturday that his conservative-led government had to make deep budget cuts because of economic mismanagement by the previous Socialist-led government of Prime Minister José Luis Rodríguez Zapatero. "That is the origin of many of our difficulties," Mr. Rajoy said in Vitoria, capital of Spain’s Basque Country region.

Source: The Wall Street Journal