More pain for Spain

November 6, 2012

El Pais has seen tomorrow’s European Commission forecasts for Spain and they’re grim. The Commission predicts the economy will slide by 1.5 percent next year while Madrid’s forecast is for a 0.5 percent contraction. That puts the target of getting the budget deficit down to 3 percent of GDP  even harder to attain – the Commission predicts a deficit of 6 percent next year and 5.8 percent in 2014 while the Spanish government insists it will get it down to 2.8 percent in two years’ time.

Peering through the numbers, the key question is whether this vista will make it more likely that Spanish Prime Minister Mariano Rajoy will seek help from the euro zone rescue fund, after which the European Central Bank can intervene to buy Spain’s bonds.

Rajoy has been in no hurry to seek help and given Spain’s funding needs for this year will be met in full after an auction on Thursday there is no pressure on that front. But with the economy in dire straits its borrowing needs are likely to climb next year so a pre-emptive strike would have some merit. It would also give the euro zone the broader benefit of showing the ECB will put its money where its mouth is. ECB policymaker Ewald Nowotny said yesterday that the ECB’s bond-buying programme should be put into use to dispel market doubts – not that that is a consideration for Rajoy.

Greece remains the elephant in the room although the crucial parliamentary vote falls tomorrow. A two-day general strike in protest at the harsh cuts being imposed by its lenders begins today. A senior EU official told us at the Mexico G20 that a deal would not be completed at next Monday’s meeting of euro zone finance ministers, as had been expected. Greek officials are saying that without more money Athens could miss the repayment of a 5 billion euros treasury bill on Nov. 16. The official said that crunch point had been “exaggerated”. Hmmm. We know Germany and the IMF are at loggerheads over the need for euro zone governments and the ECB to take a haircut on the Greek bonds they hold in order to make the numbers add up.
But it’s in no one’s interests to let Greece go at this point, so some sort of a deal should still be done.

Greece sells yet more T-bills today and can continue to do so to fund itself in the short-term as long as the ECB doesn’t raise an objection.  Greek banks no longer have access to the wholesale market due and are completely dependent on the national central bank for liquidity. The Bank of Greece is, in turn, dependent on the ECB’s approval. That issue, among others, will feature in a preview of Thursday’s ECB policy meeting which will run this morning. We also have our team at the ASEM summit in Laos primed to ask Greek questions of Van Rompuy and others.

The crunch vote, on labour reforms which include scrapping automatic pay rises and cuts to severance pay, is due on Wednesday. The smallest coalition, the Democratic Left, will vote against. That leaves the two larger parties – New Democracy and PASOK – with a working majority of just nine lawmakers and on a less contentious vote on privatizations last week, a number of PASOK deputies rebelled. It’s going to be tight and there doesn’t seem any way its lenders will release more bailout money if the vote is lost.

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