Spain's central bank chief says budget projections overly optimistic

Fri, Oct 5, 2012, 01:00

SPAIN’S CENTRAL bank chief undercut the government’s proposed 2013 budget yesterday, saying it was based on over-rosy forecasts for economic growth and tax revenue.

Speaking to a parliamentary budget committee, newly appointed central bank governor Luis Maria Linde delivered a blunt message as prime minister Mariano Rajoy weighs when to seek an international bailout.

“This outlook . . . is certainly optimistic in comparison with the outlook shared by the majority of international organisations and analysts,” he said.

Mr Linde said the government, which has already hiked taxes and cut tens of billions of euro in costs, should consider further steps this year to meet next year’s deficit target of 4.5 per cent of gross domestic product agreed with the European Union.

Expectations that Mr Rajoy will request a euro zone rescue package before the end of the year lowered Spain’s borrowing costs at a treasury auction yesterday of €4 billion in government bonds. The yield on bonds due in 2014 dropped significantly to 3.282 per cent from 5.204 per cent when debt was last sold, in July. But market pressure could return if Mr Rajoy drags his feet on seeking a bailout or is held back by German reluctance to put more assistance for Spain to its parliament.

The European Central Bank has pledged to support Spain by buying its short-term debt on the open market, but only once Madrid signs up to the conditions attached to European aid.

“Markets are giving Spain the benefit of the doubt in anticipation of a rescue. Foreign investors need to see some sort of conditional backstop in place before seriously thinking about buying Spanish debt again,” said Sassan Ghahramani, head of New York-based hedge fund consultancy SGH Macro.

The euro zone is considering aiding Spain by providing insurance for investors who buy government bonds in a move designed to maintain Spanish access to capital markets, shaping a rescue differently than the previous full bailouts of Greece, Ireland and Portugal.

The bond guarantee scheme, which is under consideration and has not been decided yet, would achieve two important aims.

Spain would be rescued without draining Europe’s entire bailout fund and there would be no contagion to Italy.

Mr Linde said most independent forecasters expect a 1.5 per cent economic contraction in Spain next year, rather than the 0.5 per cent fall on which the government based its calculations.

Mr Rajoy sent a tough budget to parliament last Saturday with €13 billion in savings from spending cuts and tax increases.

The budget included a 1 per cent increase in state pensions next year but Mr Rajoy has not yet said whether he will maintain an inflation-pegged rise in pension payments as well. Mr Linde said an inflation adjustment to pensions would be so costly as to endanger budget execution.

The government is also taking on additional debt – some of it from European rescue funds – to bail out troubled banks and cash-strapped regional governments.

The central bank chief also urged ministers to make a prudent forecast for revenue next year, saying the tax-take outlook in the 2013 budget was subject to downside risks.