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Strain in Spain [ClearOnMoney]
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Commentary

Strain in Spain

25 Sep 2012 by Jim Fickett.

The central government will fail to meet deficit targets. The regions are asking for bailouts amid serious shortfalls, e.g. pharmacies running low on medicines. The agreed bank bailout is running into some obstacles. For the austerity/bailout path to succeed requires that everyone feel the sacrifices are necessary, but protests are running high and Catalonia, the richest region, is talking of secession. All this is in addition to the well known bank deposit flight. It seems the recent improvement in sovereign yields is somewhat optimistic.

The central government budget deficit is, not surprisingly, failing to meet optimistic projections. From Reuters:

Half-year deficit data indicate national accounts are already on a slope that will drive Spain into a bailout. The deficit to end-June stands at over 4.3 percent of gross domestic product, including transfers to bailed out banks, making meeting the 6.3 percent target by the end of the year almost impossible. …

“Its going to be difficult keeping the deficit to around 2 percent in the second half, when the first half was closer to 4 percent, especially since traditionally, the second half deficit is higher than the first,” said Juan Ignacio Conde-Ruiz, economist at Madrid's Complutense University. …

Rajoy has been careful to highlight the importance of next year's deficit target of 4.5 percent of GDP though any shortfall this year will weigh on 2013's accounts. After slashing civil servants' wages, raising value added tax and cutting health and education spending, Rajoy is running out of options.

The regions are in a bad way. Valencia is many months behind on its bills, and the pharmacies are consequently low on medicines. From the BBC:

The sign on the wall [of one pharmacy] tells the story. “Important information. The government of Valencia owe this pharmacy for all the medicine we have dispensed to you in January, February, March, April and May”.

And not just this pharmacy. The government of Valencia - which runs the health system - owes a grand total of half a billion euros to the region's pharmacies.

Paula [the pharmacist] guides me into that back room that exists in all pharmacies, where the prescription drugs are kept. The problem is, now, there are not many drugs left.

“Look, this drawer is usually full,” she says, pointing to where the suppositories are kept. Now there are only two packets.”

She opens the fridge. “Look,” she says, “we are down to our last packs of insulin. We just have no money to buy the stock.” …

[The regions] are expecting the central government to provide them with the cash they need. But the central government is in trouble too: it cannot borrow - except at punitive rates.

The regions cannot borrow either. Valencia's deep in debt

The markets are counting on the ECB to buy unlimited amounts of Spain's debt to keep yields down. But Draghi has promised that any recipients will have to agree to a full bailout, and to keep to the terms thereof. Spain is not able to keep even current agreements, and is loathe to ask for a full bailout. Even the limited bank bailout, supposedly already agreed, is in trouble. From the Financial Times:

signs that a German-led group of eurozone countries were attempting to roll back an agreement reached in June that would free Spain of tens of billions of euros in bank bailout debt.

Under the June deal, Spain’s €100bn bank bailout would be shouldered by the new €500bn eurozone rescue fund, the European Stability Mechanism, rather than the Spanish government.

On paper the ESM will not be given legal powers to take over the bank bailouts entirely until the eurozone politicians have agreed to a federal banking supervision system. But according to senior officials Spain has promised that its bailout will be covered even though it is scheduled to begin in November well before a final agreement.

However, after a meeting between the German, Dutch and Finnish finance ministers on Tuesday, the three said the ESM would not be allowed to take over “legacy assets” recapitalised before the banking supervision system was in place. This calls into question the markets’ assumption that Spain’s bailout and any assets put in the soon-to-be-created Spanish “bad bank” will be covered by the deal.

To go forward with the current program requires that ordinary citizens be convinced the cutbacks are in their long-term interest; but it seems protests are getting more violent. And it would require the regions and the central government to work together, but Madrid has used the crisis to try to increase control over the regions, and Catalonia, the richest region, which has long flirted with dreams of independence, feels hard done by in the crisis, and is pushing to be separate:

Spain lurched further towards a full-blown constitutional crisis as Catalonia announced a snap election potentially opening the way for the country’s most economically important region to declare independence from Madrid. …

“The hour has come to exercise our right to self rule,” said Artur Mas, Catalonia’s president. He called the vote, which is likely to be cast as a proxy referendum on Catalan independence, after Mr Rajoy last week rejected his demands for greater fiscal autonomy, triggering a wave of nationalist sentiment in the northern region. …

Two weeks ago, at least 600,000 pro-independence demonstrators marched in Barcelona, with polls suggesting support among Catalans for splitting from Spain has grown considerably since the crisis began.

Mr Mas said the Catalan vote, called nearly two years ahead of time for November 25, was needed as any referendum on independence organised without a fresh mandate would be “a fraud”. Earlier Soraya Sáenz de Santamaría, Spain’s deputy prime minister, criticised him for “adding a crisis to the crisis”.