Spain works hard to cut deficit
Spain is cutting its deficit faster than Ireland, Portugal or Greece, seeking to reassure investors that the nation deserves cheaper borrowing costs than its peers. Spain’s central government trimmed the deficit by 42 percent in the first nine months, compared with 31 percent in Greece and a widening budget gap in Portugal. The figures were released yesterday as budget talks broke down in Portugal, and Greece said its shortfall was bigger than reported, pushing up the yield premium investors demand to hold sovereign debt of the so-called euro peripherals over comparable German bunds.
Portuguese 10-year bond yields rose 27 basis points to 5.96 percent, the biggest one-day advance in more than a month. Greece’s yield jumped 73 basis points and Ireland added 32. Spain’s yield gained 9 basis points, leaving the spread over bunds near a 10-week low, reached the previous day.
“Investors seem to be differentiating more between markets as Spain has decoupled in a sense,” said Olaf Penninga, who helps oversee 140 billion euros ($193 billion) at Robeco Group in Rotterdam. He said his view has become more “constructive” on Spanish debt. Spain, which was forced in May to deny speculation that it might follow Greece in seeking an international rescue, slashed public sector wages 5 percent, reduced investment spending and increased value-added taxes in a bid to cut the budget deficit in half in two years. The measures are paying off as the yield difference with Germany has fallen by more than 25 percent from a euro-era high of 221 basis points in June, while spreads for Portuguese and Irish securities rose to records last month.
“Generally the budget seems to be on track and that’s a much better sign than in some countries where this data didn’t show an improvement, so in that sense some of the risks have abated,” Penninga said. The spending plan includes the deepest budget reduction in at least 30 years and aims to slash a deficit of 11.1 percent of gross domestic product last year, the euro region’s third largest, to 6 percent next year. That would leave Spain with a shortfall on par with France.
“There’s more conviction that the 6 percent deficit is achievable,” said Antonio Garcia Pascual, chief southern European economist at Barclays Capital in London. “They’re on track and my sense is they’ll end up a little bit better than 9.3 percent this year.” Prime Minister Jose Luis Rodriguez Zapatero, who leads a minority government, has already mustered enough support in parliament to pass the plan in an initial vote, cutting deals with two regional parties that should assure his government survives until scheduled elections in 2012. By contrast, Portugal’s opposition broke off talks on the minority government’s fiscal blueprint, jeopardizing its passage in a parliamentary vote set for next week and fueling the drop in its bonds. Portuguese Finance Minister Fernando Teixeira dos Santos said yesterday that failure to pass the budget “will plunge the country into a profound financial crisis with very serious consequences for our economy, in which we’ll see the channels of financing for our economy blocked. ”
Spanish tax revenues rose 13.5 percent in the first nine months as the sales tax increase kicked in, according to the government data published yesterday. Spain’s ability to maintain that revenue growth may be hampered by a jobless rate of almost 21 percent that will lead the economy to contract for a second year in 2010, damping tax collection. So far this year, Spanish long-term bonds returned 2.6 percent, compared with the 10.3 percent decline for Portugal and 6.2 percent drop for Irish securities of 10 years or more, data compiled by Bloomberg show. Of the peripheral countries, only Italy, with a deficit of less than half that of Spain, has performed better. Its bonds gained 6.2 percent.
Spain is among the peripherals most vulnerable to rising borrowing costs. Greece accepted a European Union-led bailout that should finance the country for at least two years. Ireland doesn’t need to issue bonds for the rest of this year and Portugal has met 94 percent of its financing needs, compared with 83 percent for Spain, said Chiara Cremonesi, a fixed-income strategist at UniCredit Bank in London.
“We’re still short Spanish bonds because we see the risk of supply not being taken very well over the next four bond auctions,” said Gianluca Salford, a fixed income strategist at JPMorgan Chase Bank in London. “But if things continue as they’ve been over the past few weeks, Spain will continue to tighten gently in line with Italy.” While the relative risk of Spain has eased relative to the other peripherals, investors still perceive that there is a greater chance of the country defaulting than the Philippines, Thailand or Morocco. Credit default swaps protecting Spanish government cost 206 basis points yesterday, more than the 130.9 for the Philippines, 122.2 for Morocco and 89.3 for Thailand. “When you look at the figures in Spain, I think we’ve seen the worst,” said Michael Wenselaers, a portfolio manager at KBC Asset Management in Luxembourg, who’s underweight in Spain and “waiting for the right moment to step back in.”
Source: Bloomberg
