“When it gets serious, you have to lie,” Luxembourg’s Prime Minister and eurocrat tells us. It is getting serious in Spain.
This article parrots the Spanish Finance Ministry’s claim that it will be issuing €121.3bn in new bonds during 2013. This is a very optimistic forecast, because it is based upon a budget deficit that is magically cut in half during an economic depression with unemployment at 26.6% and rising. If Spain were a public company and not a sovereign kingdom, it would be subject to the anti-fraud provisions of the ’33 Act. Alas, while it is not subject to SEC law, it is certainly subject to my blog, so let’s break it down.
Spain must finance maturing debt, the region’s budgetary requirements and next year’s central government deficit. Spain has €60bn in maturing debt, regional budgetary needs of €23bn and a budget deficit of €90bn (8% of GDP). Spanish officials will tell you that the budget deficit will be €30bn lower at 5.4% of GDP, but this is an impossible goal. Even the 8% that I am using is optimistic as that is a decrease from 2012 while economic conditions will not improve much in 2013.
Adding these figures together, we find that Spain must finance €173bn, which is €51.7bn more than the proposed bond sales of €121.3bn. There is a hole in Spain’s budget for next year, and it may be even larger. Spanish banks continue to report more non-performing loans and will require more aid in 2013. Additionally, Spain has a €18.5bn hole from this year’s budget that must be accounted for:
Spain will need to sell more bonds than the €121.3bn proposed in order to finance itself, but it is using that smaller figure so as not to spook the markets. It will be able to increase T-Bill issuance to plug some of the hole, but ultimately it will be dumping billions more bonds on the market. Spain has already depleted most of its cash reserves, its governmental agencies have purchased as many bonds as they can and it has delayed paying suppliers just about as long as possible:
Even though new bond issuance will be close to 50% more than the Spanish Finance Ministry is planning, the bond markets should absorb the additional supply. The ECB stands ready with the printing press, which constitutes an implicit guarantee for the Spanish government. The only question is whether or not banks have room on their balance sheets for more Spanish debt. Considering the riskless profits to be made courtesy of the ECB’s low, low rates and Spain’s relatively high yields, I believe that they will buy as much of this paper as they can forestalling the inevitable crisis beyond 2013.