Alarm sounds over Spain’s rising public debt

 

The latest statistics from September 2011 show total Spanish public sector debt standing at €706bn, as measured by the EU’s deficit-control rules – a manageable 66 per cent of the country’s €1.07trn gross domestic product.  Greece secures €206bn debt swap Red faces over Greek deal talks Draghi takes on German critics German industrial orders fall sharply Click to enlarge But the total debt is already much higher than the number calculated according to the EU’s definitions. Moreover, it is growing quickly with each successive annual deficit. This year will see a further €60bn added to the total, or 6 per cent of GDP, and it could be greatly swollen in future by contingent liabilities for everything from bank bailouts to guarantees for lossmaking toll road contracts managed by the private sector. Edward Hugh, a Barcelona-based economist who has studied the composition of Spanish public debt, concludes that by EU measures it has already reached about 70 per cent of GDP, to which must be added 7 percentage points for the unpaid bills of central, regional and municipal governments, 5 percentage points for the debts of public enterprises and a further 5 percentage points for public debt held by the state pension fund. Mariano Rajoy, the centre-right prime minister, is acutely aware of the problem – not least because his government has announced it will pay €35bn in overdue bills owed to waste collection companies, pharmaceutical groups and other suppliers by municipalities and regional governments. The unpaid bills and the other extras take Spain’s actual public debt total to about 87 per cent of GDP – close to the €877bn estimated by the Bank of Spain as the amount of total public sector liabilities (although the items included by the central bank and Mr Hugh are slightly different). Spain is not unique in having a total debt higher than the EU-defined number. But if the debt continues to rise, it will become ever harder to service in a recession that has probably already begun. “Once they get past 90 per cent they could have a problem at any moment,” says Mr Hugh. Even using the more narrowly defined EU numbers, it is hard to see how Spain can obey its own, EU-compliant fiscal stability law and cut its debt to 60 per cent of GDP by 2020. Spain’s burgeoning debt problem has its roots in the housing construction boom that came to an end shortly before the collapse of Lehman. Ephemeral tax revenues from the building bonanza encouraged high expenditure in municipalities and regional governments on public swimming pools, hospitals and more, including several airports that now lie empty. Among actions that have come back to haunt the authorities was a decision to suppress inflation by keeping electricity prices down in spite of costly renewable energy subsidies. That meant tolerating the build-up of what is now a €24bn “tariff deficit” underwritten, yet again, by the government. “If you go back a few years and understand what was happening in the good years, you’ll see that people were just trying to use the government’s guarantees and the government’s money – without breaking EU rules or inflation targets,” says one Spanish financier involved in the sale of distressed debt. The onset of the economic crisis soon made things worse, sinking several savings banks that had to be rescued and ultimately leading to the transfer of billions of euros of debt from the private sector to the public. “Spain’s total debt [public and private] rose from 337 per cent of GDP in 2008 to 363 per cent in mid-2011, due to rapidly growing government debt,” said the Debt and Deleveraging report published by the McKinsey Global Institute in January. Last year, the former Socialist government of José Luis Rodríguez Zapatero tried and failed to privatise the state lottery and the airports authority, which would have reduced public debt. Today, with another recession imminent, the new government is contemplating the opposite: a €3bn-€4bn nationalisation of the underused “radial” toll roads leading to and from Madrid. “It all adds up,” says Mr Hugh, adding that Spain risks raising its acknowledged public debt ratio to 100 per cent of GDP. “When you add all the debt up, we are already in the high 80 per cent range, and two more years of ‘normal’ deficit plus more funding for the financial sector should take it through the psychological barrier,” he says.