Deficit doubts hit Spanish bonds
SPANISH bonds slumped yesterday for a second day after a European rescue of its banks was announced as Fitch Ratings said the government would miss its budget deficit targets, casting doubt on Prime Minister Mariano Rajoy’s plan to stabilise the ailing economy.
The yield on 10-year government debt rose by 17 basis points to 6,68% yesterday amid increasing concerns Mr Rajoy may fall short of his objective set by the European Union (EU) of cutting the deficit to 5,3% of gross domestic product (GDP) this year and 3% next year.
The spread over German bunds widened by nine basis points to 529 points yesterday in Madrid. Spanish bonds also fell on Friday, the day before Mr Rajoy sought a €100bn rescue for the country’s banks. Mr Rajoy has built his strategy for avoiding a full-blown sovereign bail-out around meeting deficit goals that economists said could not be achieved.
Investors’ concerns are straining Europe’s defences before an election in Greece that may determine whether the country stays in the euro area.
“An economy that is in recession such as Spain’s cannot cut its deficit by six percentage points; it’s impossible,” said Jose Carlos Diez, chief European economist at Madrid-based brokerage Intermoney. “Does Brussels want us to change the law of gravity as well?”
Greeks will vote on Sunday whether to back Alexis Tsipras, who wants to scrap the austerity plan dictated by the EU and the International Monetary Fund as a condition of its bail-out. New Democracy leader Antonis Samaras, who supports the conditions, said backing Mr Tsipras would see Greece effectively thrown out of the euro. The parties are neck-and-neck in polls.
European leaders will see the risks of a euro breakup increase unless they can develop a plan for resolving the crisis, Fitch MD Ed Parker said yesterday.
“Euro-zone politicians need to take further steps forward to reduce the risks, and we think that further steps will be required in public finances,” Mr Parker said. “We believe Spain will miss its budget deficit targets again this year and next.”
The European Commission forecasts that Spain will post deficits of 6,4% of GDP this year and 6,3% next year even after unveiling €45bn of spending cuts and tax increases. Mr Rajoy’s cuts are so deep, equivalent to about 4% of last year’s GDP, they are undermining growth and reducing tax revenue, said James Nixon, chief economist at Société Générale in London. “These massive fiscal tightenings are actually selfdefeating,” Mr Nixon said. “That particularly German focus on deficit cutting is arguably very misplaced in Spain.”
Mr Rajoy stuck to his deficit target again when he discussed the bank bail-out on Sunday, saying a balanced budget was the first plank of his plan to restart the economy, which slipped into its second recession in three years in the fourth quarter of last year. “A cleanup of the public finances was necessary to grow and to create jobs,” he said.
While economists say Spain cannot meet its targets, Bundesbank board member Andreas Dombret said on Monday central bankers were unlikely to take any further measures to boost economic growth after offering about €1-trillion of three-year loans since December. “We have done our part,” Mr Dombret said. “Now it’s up to political leaders to deliver on the fiscal and the structural policy side.” Bloomberg