Spanish businesses no longer favor a bailout. Can you blame them? After seeing how draconian budget cuts have caused depressions in fellow PIIGS Portugal and Greece it is no wonder that they have changed their tune despite the scarcity of funding inside Spain.
The reversal of the Spanish business lobby is part of a larger trend. Promises by the ECB to monetize PIIGS debt pursuant to OMT have relieved market pressure on the periphery, particularly in Spain and Italy. Cheap money from the world central banks has encouraged a carry trade on this debt as TBTF banks use free money to purchase debt yielding 3 to 5.5% depending on the maturity.
The Spanish businesses may say that they are optimistic about future conditions, but they are not putting their pesetas where their bocas are. Hiring is worsening, and unemployment is close to 26%. GDP still continues to fall at a rapid clip. The banking system is becoming weaker by the day as every month a new record for bad loans is set.
The situation will continue to deteriorate next year. Spain must sell a lot of debt to finance itself. The finance ministry is sticking to a figure of €207.2bn in financing needs next year, but this is a ridiculously optimistic projection. It is based on a projected budget deficit of 4.5% for 2013 and no money for the regions and does not include this year’s funding shortfall.
We can create our own projection, which will prove to be much more accurate. First, Spain projects maturing bonds and bills to be €157bn. This number is accurate, so it will be the pillar of our calculations.
During the eurocrisis, it is standard to issue wildly optimistic GDP and tax revenue forecasts in order to create a Potemkin Village of fiscal rectitude. The Spanish finance ministry is predicting that the economy will only contract 0.5% and that revenue will rise in line with tax increases.
In the former case, even the Spanish central bank believes that the economy will contract by at least 1.5% next year. For the latter, tax increases generally do not add as much revenue as projected. Greece, Portugal, Ireland and the U.K. have all raised taxes without capturing a corresponding bump in revenue. Spain’s ongoing depression will cause a 8.5% budget deficit next year and a corresponding €45bn budget hole according to my back of the envelope calculations.
Spanish financing needs are now €252.2bn, but there’s more. That number does not include Spain’s regions, which have lost market access. The central government will have to finance their deficits, too. Add another €20bn for a total of €272.2bn.
We’re still not done. Spain is sticking to a budget deficit forecast of 6.3%, but economists believe that it is closer to 9%. Even at 8.5%, a €25bn hole opens up in this year’s budget that will need to be filled next year. Add this in, and we get a grand total of €297.2bn in Spanish debt sales for 2013.
I am not sure that even this number will force Spain to request a bailout. Institutions seem willing to purchase PIIGS debt as long as there is plenty of cheap central bank money floating around the system to conduct the carry trade. The money merry-go-round will end, but no one can tell you when.