Friday, November 26, 2010

Spain’s Financial Outlook Comfortable

So will Spain need a bailout. Not many economists think it is likely so the answer must be yes!

Spain’s Financial Outlook Comfortable

Spain’s funding for the rest of the year remains “comfortable,” helped by better-than-forecast revenue and a shrinking budget deficit, and the government doesn’t expect problems tapping financial markets going forward, said Deputy Finance Minister Jose Manuel Campa.

Spain, which saw its borrowing costs surge to an eight-year high yesterday, has two more bond auctions scheduled this year. The Treasury will sell three-year debt on Dec. 2 and 10- and 15- year securities on Dec. 16, and has about 8 billion euros ($11 billion) still to raise this year, according to the state borrowing plan.

Campa said that since the funding plan was announced at the beginning of the year, the government has implemented public- wage cuts and other austerity steps to try to shrink its budget gap after Greece’s near-default shook investor confidence in the euro-region’s high-deficit nations.

“We have increased and front-loaded our fiscal consolidation,” he said in an interview at the finance ministry in Madrid late yesterday. “The revenues are actually above budget, so our financial conditions are better than we anticipated, so our financial position in terms of funding for the remaining month and a half is quite comfortable.”

Spain is trying to distance itself from other so-called peripheral nations after Ireland’s request for a European bailout fueled contagion through the southern euro region, pushing the extra yield on Spanish debt to a euro-era high. Spain’s economy is almost twice the size of Portugal, Greece and Ireland combined, making investor concerns about its ability to control its finances a greater risk to the euro region overall.

‘Confident’ on Deficit

Campa, a 46 year-old Harvard-educated economist, said he is “concerned” about market tensions, even as Spain’s interest costs remain low in historic terms. The former professor at New York’s Stern School of Business said he’s “confident” Spain will reach its budget-deficit target of 9.3 percent of gross domestic product this year and next year’s goal of 6 percent is unmovable.

“This is an unconditional target, this 6 percent, it’s not conditional on macroeconomic behavior,” he said. “That means being ready.”

Spain’s regional governments, whose widening deficits contributed to the surge in the national shortfall, will meet their combined budget targets this year and will start giving comparable budget data on a quarterly basis, Finance Minister Elena Salgado said yesterday, in a move she called “great progress for transparency.” Two of the 17 regions, Murcia and Castilla-La Mancha, are at risk of not achieving their individual targets and must take “significant” measures to stop the slippage, she said.

Irish Bailout

The central government is encouraging the regions to rein in their shortfalls as Ireland this week became the first nation to seek to tap the euro region’s 750 billion-euro bailout fund, a decision that led the government to call for early elections. Ireland yesterday announced spending cuts of 20 percent over the next four years as it seeks to rein in a deficit that will reach 32 percent of GDP in 2010.

Ireland’s call for aid sparked an increase in borrowing costs for Portugal and Spain, with the extra yield on Spanish debt compared with German equivalents surging to 235 basis points yesterday, the highest close since the euro was created in 1999 and was little changed today. The yield on Spain’s 10- year benchmark bond rose 2 basis points to 5.11 percent, the highest since 2002.

Deficit Shrinking

The Spanish government says it needs to execute the measures it has pledged rather than take new steps to win credibility. The central government budget deficit narrowed by almost half to 2.96 percent of GDP in the first 10 months from 5.63 percent a year earlier, Finance Ministry data shows.

That compares with a 30 percent decline in Greece’s state budget deficit, while Portugal’s central administration’s shortfall continued to widen through October and Ireland’s overall deficit including the cost of bank bailouts will be more than double last year’s level.

Spain is reducing infrastructure spending, cutting public wages, freezing pensions and raising levies including a 2 percentage-point increase in value-added tax to cut the deficit from 11 percent last year. It plans to overhaul the pension system and push through additional changes to wage-bargaining and employment rules to complement a new labor law.

In another article in The Sun yesterday, money expert Professor John Fitzgerald also predicted that Spain would escape the debt crisis. But he warned it was partly down to the fact the EU could simply not allow the crisis to reach that far – given Spain’s critical importance.

He said governments across Europe had to set up a huge fund to show markets there was no way Spain’s debt-ridden banks would collapse.

He said: “Everybody needs to stop the rot on this one. If it has ramifications for Spain, it has ramifications for Germany and the rest of the world. The real Spanish economy should come out of this reasonably OK.”

His prediction came as Portugal and Spain’s borrowing costs continued to rise. But it tallied with a Reuters poll of economists, which revealed only four out of 50 think Spain will need a bailout.

Story from Bloomberg


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