Moody’s Update Ignores Economic Reality

Spain Bailout Less Likely on Lower Funding Costs: Moody’s – Bloomberg.

Spanish yields have improved, so Moody’s takes a gigantic leap in logic claiming that Spain’s bailout (-in) chances have decreased.  This reasoning ignores the desperate plight of the Spanish economy.

GDP continues to decrease and is trending downward.  This dynamic leads to larger deficits as tax revenues plunge and the denominator in the budget deficit ratio shrinks.

Spain Annual GDP Growth with Trend

Retail sales continue to fall as well, which is very important for a government that derives so much of its revenues from the VAT:

Spanish Retail Sales

The other large portion of government revenue derives from income taxes and social welfare contributions.  Both of these will generate less cash as employment continues its downward march:

Employed Spaniards with Trend

Spain’s funding needs are more dire than recognized.  The article makes the same mistake common in the mainstream media:

Spain’s Treasury yesterday said it has covered 40 percent of its planned mid- and long-term funding for 2013. (my emphasis)

The plan is based on the Spanish treasury’s 2013 budget deficit of 4.5%.  Spain has not hit a budget deficit forecast since the onset of the GFC missing wildly every year since.  Last year, the deficit forecast was raised several times from 3.5% to 4.5% to 5.4% to 6.3% eventually ending up at over 10%.  What makes anyone believe that this year will be different in light of the economic situation?

Based on those economic figures, Spain will run a budget deficit of at least 9% assuming that the banks do not require another round of capital and the regions manage to maintain stable funding needs.  Therefore, Spain’s funding needs for the year are not 40% complete, more like 20%.

Currently, lower funding costs are keeping Spain afloat, but a rise in interest rates could precipitate disaster.  The government would require more funding while at the same time the banks would require more capital.  Spain could be next recipient of the full Cyprus.

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2 thoughts on “Moody’s Update Ignores Economic Reality

  1. Spain has nothing to worry about. 😉 The WSJ reported this morning that the Japanese have been selling low yielding JGBs and buying higher yielding Euro-bonds included Spanish debt. Problem solved!

    Talk about jumping from the frying pan into the fire.

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