Spanish Implosion Coming Up

Mike 'Mish' Shedlock

My friend Bran from Spain sent a pair of articles in Spanish that highlight the impossible situation facing Spain. The links below have a target of Google Translations.

Need to Cut 40 Billion Euros from 90 Billion

Spain needs to cut 40 billion euros from its budget to meet its deficit target for 2012. The problem is there is only 90 billion of expenses to 'play with' according to an article in Libre Mercado: The maze of Montoro: save 40,000 million without "social cuts"

To reach the deficit target agreed with Brussels, the new finance minister will have to come to his office with scissors ready.

The key figure is 4.4%. This is the deficit target committed to the EU by 2012. Would overcome a difficult situation in Spain, both to their partners as compared to international investors. In theory, 2011 will end with a deficit of 6% (so say government forecasts), this would leave a hole of 16,500 million for the coming year.

The problem is that almost no one believes any longer in these figures. Funcas predictions published yesterday, which included a deficit of 8% this year. With this figure, the gap would be closed would be about 40,000 million.

To climb this column, Treasury can raise taxes or trust fund to increase the current rates. The first has been ruled out by [Prime Minister] Rajoy, at least in the short term.

The following graph shows the distribution of state revenues by item. As seen, the vast majority, almost 70% comes from direct taxes and social contributions (income tax and companies mainly). Obviously, these items depend very much on the economic activity, any slowdown could even make predictions of the Government go down, which would make the situation even more complicated.



With this background, most of the adjustment will have to come, necessarily, on the expenditure side. At his inauguration, Montoro says he will not come to the Treasury to "make cuts, but to make reforms."

65% of spending is directed to pay the debt, the Ministry of Labour and Social Security (pensions).

The rest (35%) will have to come almost all the adjustment. This is a 91,000 million euros. Imagine the magnitude of the task.

Mission Impossible

The article says debt, pensions, and unemployment are not touchable. Also, Prime Minister Rajoy has ruled out tax hikes (for the short-term) whatever that means.

The entire setup is mathematical nonsense. Should the prime minister resort to tax hikes, it will plunge Spain even deeper into recession.

Spanish unemployment is already 22.8%.

Spain's Hidden Deficit

A second article discusses Spain's Hidden Deficit

One of the foremost experts on national circumstances says "Rajoy has no room to bring out all the hidden deficit and will not." Their main argument is the experience of what happened in Greece, where Papandreou, just come to power deficit brought to light hidden by the previous government and that is the source of the recent seizures in the debt market.

The challenges for 2011 will close with a deficit equivalent to 6% of GDP today seem to me almost insurmountable. Especially considering the revenue performance.

The data announced yesterday by the Tax Office indicated, namely that fiscal consolidation measures have saved up to 8.167 million in November, including the reduction in the VAT rate to 4% on the purchase of new housing, at a cost to the exchequer audience estimated at 115 million euros.

According to the Tax Agency , the comparison between the total amount of regulatory impacts and increased revenues accumulating to November (761 million) it follows that in the absence thereof, the tax revenues would decline recorded in 2011 around -4%, "in line with the fall of the aggregate tax base of taxes in the first three quarters."

This drop in real income-without 'extraordinarios'-explains the suspicion that the real deficit will grow as and when the accounts of the autonomous communities, municipalities and social security itself, which will close this year with a deficit, when expected a surplus of four tenths of GDP, about 4,000 million euros. Especially considering that during the second half of the year the economy has performed worse than the first. And in this context, appear with a deficit of 7% or 8% before the markets seems to be a problem for the new government.

The simple translation is Spain's budget deficit is bigger than they say and revenues are expected to drop next year by 4%.

Bran writes ... "This article tells us that the new government cannot afford to bring out all the debt into the open because when Greece did so, the markets abandoned the country. For each 1% the deficit is off target, another 10 billion must be cut from 2012. People are placing the deficit for 2011 at 7 or 8% as opposed to the planned 6%. FUNCAS gave the 40 billion cut needed mentioned above based on 8% deficit this year."

The Prime Minister apparently thinks if he does not admit the debt and the worsening deficit, the market will ignore the problem. We will soon find out for how long.

Mike "Mish" Shedlock