Bank of Spain, IMF skeptical on feasibility of deficit targets

The IMF and the governor of the Bank of Spain, Miguel Ángel Fernández Ordóñez, on Tuesday echoed the financial markets by questioning the government’s budget assumptions for this year on a day in which the Treasury was forced to sharply raise yields at a debt tender in the wake of a worrisome surge in the country’s risk premium.

The government is aiming to reduce the budget deficit to 5.3 percent of GDP this year from 8.5 percent last year, when the previous administration overshot its goal by a full 2.5 percentage points. It aims to bring the figure within the European Union’s ceiling of three percent the following year.

However, the IMF said it did not expect Spain to meet the three-percent figure until 2018, while it predicted a shortfall for this year of six percent of GDP, and 5.7 percent the following year.

In the latest edition of its World Economic Outlook, the IMF predicted a slow improvement in the global economy but highlighted Spain as an exception among the advanced countries, predicting GDP will contract 1.8 percent, compared with an earlier estimate of a fall of 1.6 percent. The Bank of Spain forecasts GDP will shrink 1.5 percent, while the government’s figure is for a drop of 1.7 percent.

The IMF acknowledged it did not have access to the text of the draft 2002 budget when it drew up its forecasts for Spain. It said while fiscal consolidation is appropriate for Spain it would have preferred for it to be carried out at a slightly more moderate pace.

While emphasizing it was “crucial” for the government to meet its deficit targets, Fernández Ordóñez identified “downside risks” on the side of both revenues and spending in the 2012 state budget within a recessionary scenario.

On the revenue side, he said the projections for corporate income tax receipts and those from the declaration of black-market money, under an amnesty for tax dodgers, were subject to the “effectiveness of numerous legislative changes.”

The governor also identified unemployment benefits and state pension obligations as sources of possible deviations from budgeted figures. The IMF expects unemployment in Spain over the next two years to remain close to 24 percent.

Fernández Ordóñez said that given last year’s failings, a “meticulous and rigorous” monitoring of the execution of the budget was needed to quickly correct such deviations. He suggested the government should resort to raising indirect taxes, such as the value-added tax, if additional measures are required to meet the targets.

The administration has rejected increasing VAT in order not to hurt spending.

Treasury auction

Meanwhile, the Treasury issued 3.177 billion euros in 12- and 18-month bills on Tuesday, above its maximum target of 3 billion. However, the marginal rate on the one-year issue almost doubled from the previous tender in March to 2.738 percent. The rate on the 18-month issue climbed to 3.200 percent from 1.770 percent. Demand for the 12-month issue exceeded the amount sold by 2.9 times, and by 3.77 times in the case of the longer-dated paper.

Spain’s risk premium has risen sharply since the start of March when the government confirmed the blowout in the deficit figure for last year. It eased yesterday by 21 basis points to 413.