Spain: Debt Problems Worse Because of Local Government

By Marc Chandler

European officials have been successful in establishing a firewall around Spain and insulating it from the crisis in the peripheral. That firewall may be tested shortly.

Related Posts
1 of 935

Spain holds local and regional elections on Sunday ahead of the national election next year. Socialist Prime Minister Zapatero has already indicated he will not seek re-election. The difference between being quitting and being fired is a fine line as Zapatero would most likely lose if he were to run. His Socialist Party is headed for a drubbing in Sunday’s contests. In particular, the polls show they are likely to lose 9 of the 13 regions and some key cities like Barcelona (for the first time in 30 years).

Subscribe to our newsletter

The change of power on the regional level is important in Spain because of their relative fiscal autonomy. Regions control spending on health care and education and account for half of government employees. They have an outstanding debt of 115 bln euros (~$165 bln). The risk is that what happened in Catalonia, the largest region, is repeated in other regions that the Socialists lose on Sunday. The new government in Catalonia declared that its deficit was really 60% more than the previous government had forecast. Catalonia’s long-term debt rating was cut yesterday by S&P from A+ to A, noting debt and deficit concerns. It retained a negative outlook.

It is thought that ahead of the regional elections, the existing governments have little incentive to implement the agreed upon austerity measures. The new regional governments will be under pressure to take most of this year’s fiscal measures in the remaining months of the year. One way in which we have managed to quantify the de-coupling of Spain from the periphery is to track the correlation between Spanish and Portuguese bonds. The correlation (both the 30 and 60 day) had fallen at the start of this week to the lowest level since last Sept/Oct, which itself was the lowest since the crisis began.

The risk is that the correlations will rise post-election. Spanish bonds have already begun under performing and the risk is that this continues and is aggravated in the days ahead. This week Spanish 10-year yields are the worst performing in the euro zone but Greece. 5-year CDS prices on Spanish sovereign debt is at 2-month highs today. Clearly, then some bad news has been discounted, but given the far reaching implications of the potential magnitudes involved, there is likely more scope for adjustment.

Get real time updates directly on you device, subscribe now.

1 Comment
  1. DavidLazarusUK says

     I think that if you go even deeper into local spanish politics you will find even more problems. At the town level there was rampant corruption and many councillors are in jail for various offences. I vaguely remember of a case a couple of years ago when a Britishg ex-pat who was on the council, but because he was not part of the ruling group was made town dog catcher. As a result of so many councillors being imprisoned he ended up running the council. 

    With so many councils having close links to the caja’s and everyone skimming something from all the deals it meant that there was unwillingness to deal with problems. Even so this is not unique to the socialists.

    In each troubled nation in every election since the crisis the ruling party has been thrown out. This could be temporary as I doubt that the incoming parties will be able to resolve the problems. So in five years time it could all change again. 

  2. Anonymous says

     I think that if you go even deeper into local spanish politics you will find even more problems. At the town level there was rampant corruption and many councillors are in jail for various offences. I vaguely remember of a case a couple of years ago when a Britishg ex-pat who was on the council, but because he was not part of the ruling group was made town dog catcher. As a result of so many councillors being imprisoned he ended up running the council. 

    With so many councils having close links to the caja’s and everyone skimming something from all the deals it meant that there was unwillingness to deal with problems. Even so this is not unique to the socialists.

    In each troubled nation in every election since the crisis the ruling party has been thrown out. This could be temporary as I doubt that the incoming parties will be able to resolve the problems. So in five years time it could all change again. 

Comments are closed.

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Read More