2011 promises to be an interesting year for Spain.
Market focus is shifting southwards following the de facto nationalisation of Ireland’s banking sector. Cue some impeccable timing from Nomura, who predict serious headwinds swooshing across Iberia in the next 12 months.
The bank’s analysts have reflected that Spain’s debt-to-GDP ratio is low relative to other peripherals, providing a buffer against jittery investors.
However, there’s a catch:
Current and expected growth rates of nominal GDP fall well short of its average funding cost; in the absence of primary balance surpluses, Spain’s debt-to-GDP ratio is bound to deteriorate rapidly. Those primary surpluses, however, are very hard to generate (our economists project a primary deficit for 2011 of 5.2% of GDP and for 2012 of 3.5%. Spain funds a costly social security system, which is burdened by heavy expenses due to unemployment benefits at a very high unemployment rate (20%), while at the same time public revenues are failing to recover due to their dependence on housing-fuelled growth. The combination of anaemic revenues and heavy costs, coupled with increasing cost of borrowing, leaves little room for optimism with regard to the pace of deterioration of its debt trajectory.
Which could make rolling €59bn of bonds in six months next year a tricky prospect, according to this Nomura chart:
The three long red bars refer to sales of €18bn in April, €23bn in July and a further €18bn in October. Put the dates in your diary. (If this week’s less than smooth bond sale is anything to go by, the small January sale might not be plain sailing either.)
And then there’s the elefante in the room, the known unknown that is Spanish bank assets:
Finally, the big unknown remains Spanish banks. We have repeatedly noted that over the past few months Spanish banks have decreased their use of ECB funding markedly (see Macro Chart Alert – The good, the bad and the ugly, 12 November); nonetheless, a number of uncertainties remain regarding the condition of the local Cajas, especially in light of their exposure to mortgage loans in an environment of a deflating housing market. Quantifying their financial position accurately is a very hard task.