European Commission may give Spain a little more time for deficit cuts

Guest post by Jimmy Kane

EC ready to help Spain
Officials are ready “to consider” giving more time

Spain can breathe a little easier if the European Commission decides to give the country more time to meet its budget deficit rules while battling with an ever-deepening recession.

Commission officials are reportedly ready “to consider proposing an extension of the deadline to correct the excessive deficit by one to 2014,” Olli Rehn, the Economic and Monetary Affairs Commissioner said during a news conference in Brussels.

So far, Spain has the third-largest budget gap in the entire euro zone, comparable to Greece’s situation. Yesterday Prime Minister Mariano Rajoy repeated a plea for European authorities to support his government’s efforts as the yield on Spain’s 10-year benchmark bond jumped 22 basis points to 6.67 percent.

On the other hand, Economy Minister Luis de Guindos said that the yield premium investors demand that they should hold Spanish 10year debt over their similar maturity German bonds (which, by the way, reached a euro-era record of 540 points today) isn’t a sustainable option.

Rajoy, who has held power since December, pledged in March to reduce overspending by cutting the budget deficit to 5.3 percent of the GDP. The equivalent of 3.6 percent is what’s been overspent this year alone, but the limit set by the EU for all other euro zone members is a mere 3 percent, a number Rajoy hopes to meet by 2013. The shortfall last year reached 8.9 percent. Rajoy’s People’s Party administration is stepping up these sorts of austerity efforts even with the economy itself set to contract 1.7 percent this year.

Why would the Commission agree to more flexibility? It’s only under the condition that Spain can effectively “control the excessive spending at the subnational level, especially by the autonomous regions.” Additionally, Spain will need to present a solid 2013-2014 budget plan.

The European Commission said in a staff report that the policy plans Spain has submitted so far “lack sufficient ambition” as the nation hasn’t done nearly a large enough overhaul of their labor rules and its tax system. The recommendation is for Spain to raise environmental and consumption taxes while at the same time, reducing tax advantages, such as the favorable fiscal treatment of residential housing.

Miguel Angel Fernandez Ordonez, better known as the Bank of Spain Governor, said meeting deficit targets will be “tremendously arduous” as projected tax receipts may come in lower than anticipated and spending might even be higher than planned.

Jimmy Kane is an avid traveler and Spanish real estate hobbyist. When he’s not traveling or studying the Spanish property market, he maintains a telecommunications website called Cable in Dallas, Texas.

Spain agrees new deficit target

Mariano Rajoy
Rajoy claimed victory over deficit target

Brussels has set a new deficit target for Spain and Mariano Rajoy’s government have accepted it, claiming a victory after winning some concessions.

The target for this years budget deficit is now 5.3% of GDP, slightly lower than the 5.8% target that Rajoy set last month without consulting EU officials.

Following the decision Spain’s economy minister, Luis de Guindos, said “Spain is completely committed to the budget adjustment,” and that the new target “will be accepted by the government”.

The new target is half a percentage point lower than Rajoy was hoping for and this means an extra five billion euros must be saved via spending cuts or tax increases. This is on top of the 15 billion euros of savings already expected in the upcoming budget.

Rajoy is claiming a political victory despite EU ministers rejecting his 5.8% target, which he said was a matter of national sovereignty, as the original target passed from Brussels was 4.4%, previously agreed by Zapatero’s socialist government.

The prime minister argued that his government had inherited a large deficit overshoot when they were elected in November and risked another recession if he imposed too much austerity, an argument which the EU’s senior economic official, Olli Rehn, accepted.

Spanish foreign minister, José Manuel García-Margallo said “The Spanish government has won this battle.”

He added that EU leaders had taken the Spanish arguments seriously saying “They gave us the maximum possible.”

The Spanish government have previously said that Spain will cut their public sector deficit to 3% of GDP by 2013 and this was reiterated in Brussels.

Sr. Rajoy has yet to announce how he intends to meet the target as the national budget has been postponed pending the outcome of the regional election in Andalucía, due later this month. The region is currently under socialist rule.

Economists and analysts say it will be difficult for Spain to reach it’s target without increasing the risk of a second recession. Too many spending cuts or tax raises could push the economy downwards, increasing unemployment which, in the long run, will not increase tax revenue for the state.

“We remain concerned that it will be very difficult for Spain to achieve this level of fiscal consolidation, especially given that the economy has already moved into recession,” Barclays Capital said on Tuesday.

EU inspectors examine Spain’s finances

The European Commission (EC) has sent inspectors to examine Spain’s finances after the deficit for 2011 came in much higher than expected.

Spain’s deficit for 2011 was 8.5%, 2.5 points above the 6% that the European Commission was expecting.

Madrid also failed to meet it’s 4.4% target finishing the year at 5.8%.

Amadeu Altafaj, the EC spokesman on economic and monetary affairs, said “Technicians of the European Commission have been in Madrid this week to collect information on the (2011) public accounts,”

“It is a normal practice in all countries under an excessive deficit procedure,” he added.

Monetary Affairs Commissioner, Olli Rehn, has requested more details of the budget for 2011 and the final figures as some officials in Brussels have privately suggested that Rajoy’s new government may have overestimated the deficit for political reasons.

Deputy Prime Minister, Soraya Saenz de Santamaria, said the government have provided all information requested by the Commission.

“We gave them as much information as we could, with the maximum transparency… Not only did we give the data they asked for but also the mechanisms we’re putting in place so that these circumstances don’t happen again,” she said at a press conference.

Commission President, Jose Manuel Barroso, said he believed Spain would present a 2012 budget “fully in line with EU budget rules”.

The commission are insisting that Spain present a budget based on the 4.4% target adding that there will be no discussions on relaxing it until May.

One eurozone official said that the commission could accept it if the target could not be reached due to worse than expected growth but only if all efforts to reach it had been made first.

Spain will miss 2012 deficit target

Mariano Rajoy speaking in Brussels
Spain will miss target, says Rajoy

Spanish prime minister, Mariano Rajoy, has told Brussels that Spain “will miss” their 2012 deficit target, putting the country at risk of sanctions from the European Union.

The announcement was made shortly after the prime minister had signed a new fiscal agreement with fellow EU leaders. The pact is supposed to ensure all member states’ commitment to disciplined finances and the prevention of debt build-ups that many blame for the crisis.

Spain is in an increasingly difficult position with unemployment levels still rising and a fall in economic output, making the EU imposed target of 4.4% “almost impossible”.

Sr. Rajoy, who’s PP party swept to election victory in December, made no apologies for his comments, saying that the 2012 deficit target was not realistic, given the country’s economic problems.

However, Rajoy said Spain still plans to cut its deficit to 3 per cent in 2013, bringing the country back in line with the new fiscal rules. He said that his government was committed to austerity.

Rajoy expects this years deficit to be 5.8% of GDP, a fall from 8.5% in 2011, but still above the 4.4 per cent it had previously agreed with the EU.

Meanwhile, in Madrid, Economy Minister Luis de Guindos announced the 1.7% GDP contraction forecast and said the economy is expected to shrink further in the first two quarters of 2012 and possibly the third, before beginning to pick up. The minister blamed slowing domestic consumption, high oil prices and a slow in the world economy.

He also added that unemployment will rise over the short term as recent labour reforms passed by the new government will take time to have any noticeable effect.

Spain seeks support over deficit target

Mariano Rajoy, Spain’s prime minister, is seeking support from his EU counterparts after requesting a reduction in his country’s deficit target.

Rajoy, elected last November, said on Wednesday that Spain would do “everything we can” to cut the budget deficit because the public sector could not continue spending 90 billion euros more than it earned each year.

Spain announced this week that its 2011 budget deficit was 8.5 percent of GDP, much higher than expected. This will make the 2012 target harder to achieve.

The PM said recently that Spain’s target of 4.4% is almost impossible to meet and has discussed the options for increasing the target.  This has apparently upset a few people within the Commission, where officials view Rajoy’s efforts as improper politicisation of what should be a technocratic judgement by staff economists.

Rajoy accepts that deficits need to be cut but not at the expense of job creation, which is a top priority for Spain where unemployment is currently at 23%, one of the highest rates in Europe.

“We will lower (the deficit) as much as we can, but these policies should be made compatible with those used to create jobs,” Rajoy said speaking to Radio Nacional de España. “We will do it with no rush but no pause.”

But the Commission says it is not willing to show flexibility until Spain provides an explanation of why the 2011 deficit was so much higher than expected and puts forward new austerity measures to help meet this years target.

“There is an in-depth debate: is it logical to maintain targets as if nothing had happened?” said Joaquín Almunia, Spain’s European commissioner. “That is a political discussion that may start tomorrow [Friday] in the European Council and I think it is better to have this discussion with as much data as possible on the table.”

Some smaller euro-zone countries have expressed anger over Rajoy’s efforts saying they viewed it as an attempt to get special treatment.

“It would question the entire economic governance tool kit,” said a senior diplomat from a smaller country that has previously had it’s own fight with the Commission over deficit targets. “We hope there is equal treatment.”

Chairman of euro zone finance ministers, Jean-Claude Juncker, told Spanish radio he was sure a solution could be found for Spain, but with a second recession on the horizon, escalating unemployment and unpopular tax increases there has to be a question of whether a reduced target could be met at all.

Spain asks Brussels for easier target

According to reports, Spanish Prime Minister, Mariano Rajoy, has told European officials that the debt reduction target of 4.4% will be impossible to meet and has asked to raise the target to 5%.

Officials said Spain is likely log a deficit of 8% for 2011, two points above its target of 6%. In 2010 the figure soared to 9.3 percent.

Government sources say Spain’s savings and reforms will strengthen the economy, which is still suffering from the bursting of the real estate bubble in 2008. Some say the country will enter a new recession in this quarter after only recently recovering from the recession of 2010.

Today experts are expecting the European Commission (EC) to announce revisions to the eurozone growth forecasts following the implementation of spending cuts, tax increases and job losses across the member states.

Finance minister Luis de Guindos said that Spain’s request to lift its debt targets would not appear unusual because there is likely to be a “general reconsideration of targets across the whole of the EU”.

An official said that Spain and other countries may want to use the economic data to get their targets reduced but Brussels was “unlikely” to give in to requests for change so soon.

The ongoing crisis was evident over the weekend when Spain saw 1.5 million protesters across the country objecting to drastic labor reforms recently announced.

Spain’s 2012 deficit challenge

Spain must squeeze an “unprecedented” 40 billion euros out of its 2012 budget in order to meet its deficit cutting target, Moody’s warned on Monday.

The ratings agency said the new Spanish government faced a tough challenge in 2012 due to overspending in 2011 made worse by the struggling economy, despite record tourist figures.

In December the government said the 2011 public deficit would be eight per cent of GDP which was down on the previous estimate of 9.3 per cent, but still two points over the six per cent target.

“The large fiscal deficit in 2011 is credit negative and clearly illustrates the challenge facing authorities in bringing Spain’s finances back onto a sustainable path,” Moody’s Investors Service said.

New Prime Minister Mariano Rajoy has said his government will stick to a target of cutting the deficit to 4.4 per cent of GDP in 2012.

“Achieving this year’s unchanged budget deficit target of 4.4 per cent of GDP for the general government sector requires an unprecedented effort,” Moody’s said in a report adding that “Under our assumptions the required adjustment is around 40 billion euros.”

The amount required dwarfs the country’s previous deficit reductions for 2010 and 2011 with a combined total of 28 billion euros.

Moody’s said “Achieving such a massive fiscal adjustment amid slowing economic growth risks exacerbating the negative economic outlook,”

The agency predict the Spanish economy will shrink by 0.5-1.0 per cent in 2012 following growth of 0.7 per cent in 2011.

Elected in November 2011, Rajoy’s government has announced spending cuts of 8.9 billion euros, which includes a public sector wage freeze, and tax increases to raise over six billion euros.

Rajoy vows to get Spain moving again

Mariano Rajoy
Rajoy has no "intention to raise taxes"

The new conservative prime minister of Spain, Mariano Rajoy, pledged yesterday to reduce the size of Spain’s public sector, to clean up the banking system and introduce corporate tax breaks with the aim of reducing the country’s deficit and revive investment.

In his first formal address to parliament since winning the election in November Rajoy said “Those who think that Spain will not be capable of making the necessary reforms to be successful in the Europe of the euro are totally wrong,”. Rajoy’s Popular Party took victory from the ruling Socialists who had been in power for almost eight years.

Rajoy agreed with the possibility of Spain slipping back into recession saying the outlook for the economy “couldn’t be darker”, adding that it was being “left behind” while some of it’s European neighbours grew.

“Expectations for the coming two quarters aren’t good at all,” he said.

With plans to keep the countries budget deficit under six percent of GDP, as agreed between the previous government and the European Union, Rajoy needs to cut 16.5 billion euros from the 2012 budget but did not say specifically how this would be achieved. The thought among economist and analysts is that it will not be possible for Spain to meet that target this year.

Mr. Rajoy said he hoped to introduce “cuts in every aspect of expenditure,” with the exception of pensions, which he is willing to raise. He added that public hiring will be frozen and that he had no “intention to raise taxes.”

Spain once had a booming economy but over recent years it has suffered from the effects of a huge real-estate bubble, poor growth and huge debt, as is the situation in other euro zone countries.

Rajoy said there would be a cabinet meeting on December 30th after which more details of his austerity plans would be released. The meeting will decide if Spain is likely to meet the six percent target. He added that each percentage point above the target would require a further 10 billion euros in cuts.

He said that the banks in Spain required further consolidation and that his government will force the banks to sell more of their real-estate holdings and be more conservative when providing valuations.

Mr. Rajoy also promised to make changes to Spain’s labour laws to fight growing unemployment. Spain currently shows 21 percent unemplyment, double the European average.

Austerity measures in other euro zone countries like Greece and Italy were met with angry street protests but, so far, this has not spread to Spain.

Rajoy will be formally elected prime minister on Tuesday and will be presented to King Juan Carlos I on Wednesday, at which point he will name his cabinet.

$1.3 Billion of property to sell this year

It’s not just money worries in Spain now, excess property seems to be an issue and not just for agencies.

Two of Spain’s largest regions, Catalonia and Andalusia are trying to sell $1.3 billion of property by the end of the year as the country tries to slash its budget deficit and spiralling borrowing costs.

In an interview in Barcelona, Jacint Boixasa, director of assets for Catalonia, said “We put the cream of the crop in the portfolios to ensure the sales are completed,”. “Our target is to sell 550 million euros ($742 million) of real estate by year- end, which is relatively little time.”

Spain is keen to avoid the need for a bailout, the likes of which we saw in Greece, Ireland and Portugal, and is planning to cut the nations deficit from 9.2% in 2010 to 6% of GDP. Spain’s credit rating was put on review in August in response to financial problems in the regions.

The authorities in Catalonia are attempting to sell 37 properties one of which is the Barcelona stock market on one of Spain’s most expensive commercial streets, Paseo de Garcia. The government are being advised on the sales by Aguirre Newman, real-estate consultants in Madrid.

BNP Paribas SA were hired in Andalusia to assist in raising up-to 400 millions Euros from selling 76 properties. These include youth centers in Malaga and the cultural department in Granada. Following a sale the government will then lease the buildings at a cost of around 30 million Euros per year, which seems a bit stupid to me!

Off topic a bit I know but my suggestion to the Spanish government would be to cut 10% off unemployment payments, now, today. If you don’t live in Spain you probably don’t know how much “dole” you can get here. The usual is somewhere around 80% of your previous salary. So if you were paid 1000 euros per month (for at least 3 months) you will receive around 800 Euros per month in benefits. So imagine how much is paid out every month! It’s astounding! Where is the encouragement to get back to work? There isn’t any! Many people, I’m sure, get their money and sit on the beach all day because they have no motivation to look for work.*

Cut the money, save some cash and give people a reason to look for work! 2 birds, 1 stone.