Photo: Charly Morlock
Earlier we mentioned how Citi top economist Willem Buiter had a big warning about Spain.We’ve now seen a copy of the report, and get tell you some more details.
Here is our bullet-pointed summary of the report:
- Spain’s public finances are worse than officially stated. Already there have been upward revisions to debt-to-GDP, and the number could rise as high as 90% when all the various categories of debt are added together.
- The fact that GDP assumptions are badly missing estimates makes this all worse.
- Although Spain’s banks get a lot of attention for being ugly, the non-financial sector is doing badly as well. Households are overleveraged.
- The new government delayed reform legislation too long, missing the ‘honeymoon period’.
- Spain’s PM Rajoy is alienating partners in Germany and France by announcing revised deficit targets without consultation.
- The decline in Spanish land prices is not over.
- The spending problems in various autonomous regions are big, and the central government cannot control them.
Spain is likely, in our view, to be pushed into a troika (EC, ECB, IMF) programme of some kind during 2012, possibly by losing access to market funding on affordable terms, but more likely by the ECB making a programme for the Spanish sovereign a condition for continued willingness to fund the
Spanish banks, which are currently the main buyers of newly issued Spanish sovereign debt. The existing and likely near future EFSF/ESM and IMF financial facilities are unlikely to be sufficient to both fund the Spanish sovereign fully and leave enough financial ammunition in reserve to deal with
possible sovereign financial emergencies in Italy or in the ‘soft-core’ of the euro area. The Spanish sovereign would therefore likely continue to fund itself at least partly in the markets even if it comes under a programme. To ensure market access by the Spanish sovereign, the same combination of cheap ECB funding for periphery banks and financial repression of periphery banks by their national authorities that has been effective in lowering sovereign yields since the first LTRO is likely to be required.