Investors skeptical about budget

Spain’s draft state budget for next year unveiled on Thursday failed to convince the markets on Friday on a day in which Moody’s Investors Service may announce a review of the country’s sovereign ratings and the recapitalization needs of the banking sector are due to be revealed by independent consultant Oliver Wyman.

The general feeling is that the budget is drawn up on the optimistic expectation that the economy will only contract 0.5 percent next year, what Finance Minister Cristóbal Montoro called a “gentle recession.” The IMF in July predicted output would shrink by 1.2 percent.

The government’s decision to dip into the pension system’s piggy bank to increase benefits next year was also seen as a way of boosting the government’s ebbing kudos ahead of regional elections in Galicia next month when the ruling Popular Party is looking to hold onto its mandate.

“Politically, they couldn’t do anything else,” Bloomberg quoted José Ramon Pin, a professor of public administration at the IESE business school as saying. “The big problem is the message it sends outside Spain.”

The yield on the Spanish benchmark 10-year government bond remained above six percent as the spread with the German equivalent rose 11 basis points to 462. The blue-chip Ibex 35 index was down by well over one percent.

“I don’t see anything supportive at the moment for Spanish bonds,” Bloomberg quoted Gianluca Ziglio, an interest-rate strategist at UBS in London as saying. “The stress test results are being announced later today and the Moody’s decision is coming up.”