Spanish officials just wrapped up a two hour press conference on Spain’s 2013 budget, released today.The following is what transpired:
Spain’s deputy prime minister Soraya Saenz de Santamaria took the mic first.
Saenz said that the 2013 budget – 64 per cent of which is comprised of social spending measures – is designed to end the crisis.
Saenz also said pensions, grants, and interest costs will rise in the 2013 budget – pensions, specifically, will rise 1 per cent in 2013 and the rules linking pensions to inflation will stay in place.
While Saenz introduced the budget – which she said will focus on spending cuts rather than tax hikes – Spanish government bond yields headed lower.
Another aspect of the budget includes the creation of an independent fiscal body to monitor progress on reform measures – and Spain is planning to introduce 43 new laws to bolster the economy.
Then, it was revealed that Spain will tap its social security reserve fund for 3 billion euros to cover the government’s liquidity needs (to pay pensions). This sent the euro to fresh weekly lows against the dollar.
A troubling aspect of Spain’s 2013 budget highlighted by Citi’s Jose Luis Martinez after the announcement is the Spanish government’s optimistic economic forecasts on which its budget targets hinge.
Spanish budget minister Cristobal Montoro said he sees 2013 GDP in Spain down only 0.5 per cent, and that Spain aims to make 2013 the end of the recession. Meanwhile, Montoro said the government’s deficit target for 2012 remains unchanged at 6.3 per cent of GDP – and he expects tax revenue to rise 3.8 per cent next year.
Citi’s Martinez said, “We see as too optimistic the macroeconomic assumption of 0.5 per cent recession for the next year. We see a scenario with a deeper recession and if this were the case, further spending cuts will be needed.”
The 2013 budget includes some updates to the tax code as well. In 2013 and 2014, Spain will limit tax write-offs for large companies. And it will raise the short-term capital gains tax to discourage speculation, which is expected by the Spanish government to raise 90 million euros.
Montoro said Spain’s new tax on lottery winnings over 2500 euros will raise a whopping 824 million euros.
Finally, ending mortgage rebates is expected to raise 90 million euros, and an extension of the wealth tax is expected to raise 700 million euros in 2013.
Moving to the other side of Spain’s balance sheet, Montoro said central government spending will rise 5.6 per cent in 2013 – but government ministries’ spending will fall 8.9 per cent.
The Spanish government expects Interest costs to jump 34 per cent to 38.6 billion euros.
But no cuts will be made from social spending.
Spanish finance minister Luis de Guindos then began addressing Spain’s external situation with EU creditors. He said the reform plan not only includes all EU recommendations but that it will go beyond those recommendations.
European Commission vice president Olli Rehn released a statement agreeing with that sentiment during the press conference.
De Guindos went on to address controversial pension reforms, saying that the Spanish government would in fact implement measures to reduce early retirement. He said the pension system will adapt to longer lifetimes and narrow the gap between the “legal” and the “real” retirement age.
The finance minister also said the government will encourage private-sector firms to seek funding in corporate debt markets as opposed to from banks.
Then, in the Q&A that followed the presser, de Guindos answered a question about a potential bailout from the EU and the ECB. He told reporters that that the ECB message has had a positive impact, and that now, Spain’s job is to assess the consequences of a rescue, and it will decide on a bailout request once it has all information.
Budget minister Montoro was then asked about the heavily indebted and somewhat combatant Spanish regions, who have, one-by-one, been requesting bailouts from the central government over the past few weeks.
Montoro said a lottery loan used to help fund the regional bailouts is a syndicated loan – and they’re still working on putting it together.
Deputy PM Saenz added on the issue of the burgeoning separatist movement in Spain’s largest and most important economic region, Catalonia, that Spain has power to stop any Catalan referendum on independence from Spain – any such decision would have to go to before the constitutional court.
But the conversation turned to a possible EU/ECB bailout of Spain once more in another question fielded by de Guindos. He said the Spanish government is in contact with all parties and that the rescue decision is important for all euro area members.
De Guindos also said the Spanish treasury continues to enjoy market access for funding and that average financing costs are similar to those last year – not a good sign for those who were hoping a bailout request from Spain would be relatively forthcoming.
The Spanish government is set to unveil its highly controversial 2013 budget today.
The budget briefing is to start at 11:00 AM ET.
Spanish National Radio just reported that the budget has been approved by the government and it includes about 40 billion euros of spending cuts, according to Bloomberg.
However, Spanish newspaper El Pais is reporting that the budget only includes 20 billion euros in spending cuts, including a freeze on pay for civil servants.
Via Google Translate:
The Cabinet met this morning to approve the State Budget for 2013 with a lower setting to 20,000 million euros in order to reduce the deficit and meet the targets set by Brussels. Accounts present Vice President, Soraya Saenz de Santamaria, Economy Minister Luis de Guindos and Finance Minister Cristobal Montoro. Ministries spending is reduced by 12% on average. The civil service pay will be frozen for the third year running. The unit will lose another $ 200 million next year. Development also have deep cuts in their investment until 2024. culture, very burdened by the increase in VAT, live historical cut.
Spanish deputy prime minister Soraya Saenz de Santamaria and finance minister Luis de Guindos will conduct the press conference.
The budget proposals, which seek further spending cuts to pave the way for a future troika bailout, have been met with anger in the streets by Spanish protesters.
Spain’s most important economic region, Catalonia, is also furious with austerity and is threatening to secede from the country.
Originally scheduled for 9:00 AM ET, the press conference where the budget will be revealed to the public was delayed because Rajoy was still in transit from New York this morning, according to Bloomberg.
The report – citing an anonymous government spokeswoman – explained that “Spain’s cabinet is still meeting to discuss the budget and a package of reforms and the gathering is taking longer than usual because of the amount of material to get through.”
Rajoy told the Wall Street Journal that the cuts will focus on restricting early retirement and the budget will also “include the creation of an independent agency to monitor compliance with budget targets, new job-training programs and legislation to sweep away many onerous government regulations.”
According to Bloomberg, Rajoy is seeking $23 billion in spending cuts in the 2013 budget.
And Europa Press is now reporting that the Spanish government will increase pensions 1 per cent in 2013.
Via Google Translate:
The Government included in the draft budget law for 2013 a pension increases of 1% and also keep the compensation for the deviation of the CPI for the month of November, according to Europa Press confirmed on government sources.
Thus, the draft budget law not collect any regulatory change in the Social Security Act, which would need to revalue not the CPI.
The PP government and pensions rose by 1% this year, after freezing it suffered in 2010 with the government of José Luis Rodríguez Zapatero. Now, also experience an increase of 1% in 2013, although pensioners will increase their payroll above that amount.
JPMorgan analyst Jaime Becerril thinks the cuts are likely to fall hard on Spain’s regions because “Spanish regions revealed an accumulated budget deficit of 2.9% in 2011, driving the main deviation for the country’s overall budget deficit, finishing with 8.5% vs an initial 6% target.”
Citi economist Jürgen Michels writes this morning in a note to clients that Rajoy and his government will stick to their guns on austerity:
Speaking in New York earlier this week, the Spanish PM explained that the government has a “clear economic strategy. It also has parliamentary stability of more than three years that will allow it to make the needed reforms.” Mr Rajoy added that “we know what we have to do, and since we know it, we’re doing it.” Comment: Additional austerity measures are on the menu for 2013, and more details will emerge today when the draft of the budget will be reviewed by the cabinet. We interpret this last quote from the Spanish PM as an indication that the government intends to stick to his strategy of delivering piecemeal adjustments which we expect to form part of the conditionality expected to be required as part of the granting of a precautionary credit line.
Meanwhile, headlines are crossing that the Portuguese government just approved its economic plan for 2013.
And CNBC is now reporting that the results of the Oliver Wyman stress tests will show greater capital needs for Spanish banks than before.
Data released this morning revealed that deposit flight from Spanish banks continued in August as deposits shrank 1.1 per cent.
Here is a chart from Goldman Sachs showing how ugly the deposit flight has been for Spain this year:
Photo: Goldman Sachs
Goldman analysts write this morning that “unlike July, however, the entire outflow was accounted for by reduction in ‘other’ deposits (local government, insurance and pension funds). Customer deposits (retail and corporate) saw their balances increase marginally (€1 bn), when taken together. Overall, the negative trend continues, but the pace has moderated from the peak stress levels of July (which coincided with the Bankia crisis).”
Spain’s banking system is a critical battleground in the euro crisis and we should get more clarity on the situation when official stress tests are released tomorrow.
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