Spain has announced its “most austere budget” since the 1970s. It aims to lower the annual budget deficit by more than 3% of GDP, from 8.5% last year to 5.3% this year. Will this convince investors that Spain can get its debt under control?
No, says Hetal Mehta of Legal & General Investment Management. Spain missed its deficit target by miles last year, and this year’s looks “unachievable” too. One major problem is that it relies on the autonomous regions to do part of the saving and the central government has struggled to impose its will on them in the past.
In any case, with the economy shrinking already, and unemployment at 23%, further austerity is merely likely to reinforce the downward momentum. That will in turn raise, rather than lower, debt.
A further headache is Spain’s banks. The housing bubble is still collapsing, implying further losses. So the worry is that yet more public money may have to be spent propping them up.
The upshot? Expect Spain to be “pushed into a [rescue] programme of some kind” this year, says Citigroup’s Willem Buiter.