How does our prediction on Spanish regions' deficit stand up?

Last July, we put together this 'traffic light table' of Spanish regions, based on how much each region had to cut its deficit by in order to meet the 2012 overall target of 1.5% of GDP (click to enlarge):

The official deficit figures for Spanish regions were published yesterday, so let's see how our table stands up. Unsurprisingly, Spanish regions have missed their overall target, but by a lower than expected margin. The final figure for 2012 is 1.73% of GDP - only 0.23% above the target.

Five regions have missed their individual targets (well, six if you want to include Castilla-La Mancha, which is on 1.53%, but that may be a bit harsh given that they have achieved an adjustment of close to 5.8%). Three of them (Murcia, Comunidad Valenciana and Balearic Islands) are in the 'red' region of our table. The remaining two (Catalonia and Andalusia) top the 'amber' region.

Credit where credit is due (and we're not just talking about the accuracy of our prediction). Some regions have managed to achieve a very substantial deficit reduction to meet their targets. Think of Castilla-La Mancha or Extremadura, for instance, which started from 7.31% and 4.59% respectively. However, the fact that the country's two most populous regions - Andalusia and Catalonia - remain among the most undisciplined despite receiving billions from the Spanish government's dedicated bailout fund is clearly a source of concern for Mariano Rajoy's government. 

Spain back under the spotlight soon?

We haven't blogged on Spain for a bit, but a couple of interesting developments have caught our attention today. Spain will presumably disclose its final deficit figure for 2012 shortly, and everything seems to suggest that Madrid will let its eurozone partners down once again.

Spanish Industry Minister José Manuel Soria (pictured) told a conference this morning that Spain's public deficit for 2012 will be somewhere around 7% of GDP - higher than the target of 6.3% of GDP agreed with the European Commission.

It is also probably not just a coincidence that Soria's words came just before the European Commission put out its latest update on Spain's compliance with the conditions attached to its bank bailout. The content of the report was not entirely new to us (and the readers of our daily press summary), given that a draft was leaked to El País last week. The document reads,  

Fiscal consolidation advanced in the third quarter, but the 2012 deficit target will likely be missed.

Most importantly, it adds,

The 2012 deficit target for the regions of 1.5% of GDP can...still be within reach for the regional level as a whole, but risks are substantial and a number of regions will most likely exceed their target.

You won't hear us say this very often, but well done to the European Commission for making the right prediction. Of course, we (and others) warned of the risk of several Comunidades Autónomas overshooting their deficit target as early as last July.

Anyway, Catalonia (Spain's wealthiest region) has just announced that its deficit at the end of 2012 stood at 2.3% of GDP - with the overall target for Spanish regions fixed at 1.5% of GDP. With the wealthiest region missing its targets, and few others likely to undershoot theirs to pick up the slack, it seems unlikely that the overall target will be met.

A day of bad news for Spanish Prime Minister Mariano Rajoy and his government - not least because Spain had already obtained a relaxation of its deficit target for this year. The risk is that, once the official deficit figures come out, Spain could face fresh pressure from the markets. Before complaining about being "underrepresented" in the EU institutions (see Spanish Economy Minister Luis de Guindos remarks from this morning), the Spanish government should probably do more to regain its credibility vis-à-vis its eurozone partners. Top EU/eurozone jobs would surely follow.

Looking to the New Year?

With trouble flaring up in Greece once more and the backstop of the ECB’s bond-buying (OMT) in place, Spain has slipped off the radar slightly. It now seems likely that any request for a sovereign bailout (of one form or another) will be pushed back until the New Year.

However, interestingly, Spain returned to the debt markets this week despite having its funding costs covered this year. It successfully sold almost €5bn worth of short-term debt on Tuesday and almost €3.9bn of medium and long-term debt yesterday.

This could mean many things, not least that the Spanish government is concerned about its cash position or the potential for unexpected costs (a regional or bank bailout for example), but we’re willing to give Spain the benefit of the doubt and see it as prudent planning to get a head start in covering its funding needs next year. This comes as somewhat of a relief given that gross Spanish funding needs could run between €150bn and €200bn next year.

On a separate, and slightly less positive note, the European Commission has, in a working document, questioned why the Spanish government has, in substance, refrained from intervening in those Spanish regions which are "clearly at risk of missing their fiscal targets in 2012" - despite legislating earlier this year to give itself such power? It is an interesting question, we would hazard a guess that the Spanish government is not ready to face the political consequences of such an action.

We can’t exactly blame them on this front but it raises the question of where their threshold is and what the repercussion of such an action would be.

As per usual from Spain then, a bit of a mixed bag, but at least it seems to be planning for next year. Now if only it took a longer term approach to its banking sector and labour market reforms…

Spanish regional elections: Why the victory for Rajoy's party in Galicia should not be overplayed

Following the latest round of regional elections in Spain on Sunday, the foreign media clearly seem to have focused their attention on the victory of Spanish Prime Minister Mariano Rajoy's Partido Popular (PP) in Galicia (see, among others, this article from today's FT). Of course, the fact that outgoing Galician President and PP candidate Alberto Núñez Feijóo (pictured with Rajoy) has not only confirmed his absolute majority, but also managed to consolidate it by winning three more seats than he had during his previous term is remarkable, given the nationwide drop in the party's popularity.

However, the significance of the victory in Galicia should not be exaggerated, for a number of reasons. Firstly, Rajoy is Galician. Although, as noted by the Spanish press, he avoided appearing next to Feijóo during most of the electoral campaign, Rajoy did travel quite a lot across the region - and it would be naïve to think that his personal involvement did not win Feijóo a few extra votes.

Secondly, Galicia is a region with solid right-wing credentials. The region has been governed by centre-right forces for much of the time since Spain returned to democracy - including fifteen consecutive years between 1990 and 2005 under Manuel Fraga Iribarne, a former minister under Francisco Franco (a Galician native himself) and the founder of Alianza Popular in 1976, which became Partido Popular in 1989.

Therefore, we definitely think the results of the Basque elections were far more interesting - for one very simple reason. Unlike after the previous elections in 2009, Rajoy's Partido Popular and the opposition Socialist party together do not command a sufficient majority to stop the candidate of the Basque Nationalist Party (PNV) Íñigo Urkullu becoming the region's new President - although he will need the support of other parties to secure a majority in the Basque parliament.

It is not unusual for nationalist parties to be in government in the Basque Country, but the context looks quite different this time. During the electoral campaign, Urkullu has clearly said that he wants to make the Basque Country a "European nation". The expression must sound worryingly familiar to Rajoy and his cabinet, as it clearly echoes Catalan President Artur Mas's recent calls for Catalonia to become "a normal nation within Europe".

Incidentally, a new Feedback poll for Catalan TV channel RAC1 this morning credited Mas’s party with 67 seats in the 25 November regional elections – only one seat short of an absolute majority in the Catalan parliament. The same poll also found that over 70% of Catalans are in favour of pushing ahead with plans for a referendum on the relationship between Spain and Catalonia, even if the Spanish government prohibits it.

The Catalan elections are yet to take place, but there is clearly the potential for a major 'sovereigntist' headache here - and at a time when the Spanish government can least afford it.

Spanish regions: We hate to say 'We told you so', but...

In July, we published a briefing looking at the potential impact of regional debt problems on the Spanish economy. In particular, we noted that Spanish regions were expected to make swingeing cuts to meet the overly ambitious regional deficit target of 1.5% of GDP by the end of the year. Based on the size of cuts each region had agreed on with the Spanish government, we drew the 'traffic light' table below:

Three months later, it's time for an update. Following today's bailout requests from the Balearic Islands and Asturias, eight of 17 Spanish regions have decided to tap the €18 billion bailout fund set up by the Spanish government. And guess what? Four of them (Castilla-La Mancha, Comunidad Valenciana, Murcia and the Balearic Islands) are in the 'red' area of our table - i.e. among the regions that, according to us, had agreed to unattainable deficit reduction targets for this year. Catalonia, Asturias and Andalusia - top three in the 'amber' area - have also sought help from Madrid. To date, Canary Islands are the only surprise, as they have requested a bailout despite having to make the smallest deficit adjustment of all Spanish regions.

With only less than half of regions covered (although, of course, not all of them will need financial assistance), the Spanish government's bailout fund for regions (which totals €18 billion) has almost run out of money. Here is what each region has requested:

Catalonia: €5.4 billion
Andalusia: €4.9 billion
Comunidad Valenciana: €3.5-4.5 billion 
Castilla-La Mancha: €848 million
Murcia: €641 million
Canary Islands: €757 million
Balearic Islands: €355 million
Asturias: €262 million

TOTAL: €16.7-17.7 billion

So, if all regions obtained the entire amount they have asked for, there would be almost no money left in the pot - and two more regions in the 'red' area which may well need assistance (the case of Galicia is slightly different, as we explained in our briefing). This is why the Spanish government is trying to hold off on at least part of the loans. It has, for example, agreed to lend Andalusia only €2.1 billion, and €2.5 billion to Comunidad Valenciana - for the moment. However, regional governments will presumably push to get all the money they asked for - which in turn increases the likelihood that the bailout fund will need a top up.

We remain of the view that regional debt problems will not 'make or break' Spain financially, although depending on how the payments are handled they may increase Spain's deficit - as will the fact that the regions are still likely to miss their targets for this year. In any case, though, in the eyes of Spain's eurozone partners and the European Commission, every additional region tapping the bailout fund adds to the impression that the Spanish government is simply not capable of keeping regional spending under control. For once, we agree with the EU/IMF/ECB Troika on something.

European regionalisation: do two negatives make a positive?

As we've argued before, there's a lesson for the eurozone to learn from the all the semi or full-blown separatist movements across Europe; trying to impose central control on an inherently regionalised structure is extremely difficult and artificially imposing a top-down identity remains as challenging as ever. At the same time, should a region choose to leave an EU county it could, after negotiations, be absorbed by the European structure, which in turn would have a stabilising effect on the tumultuous politics that will follow.

Therefore, separatist movements across Europe simultaneously showcase both the weakness and strengths of the European project. However, what's clear is that the austerity sweeping Europe is not only creating tensions between national capitals and Brussels, but also national capitals and regions. Just in case you thought the eurozone was on the verge of a agreeing a transfer union....

Belgium

The Flemish are as unhappy as ever about their domestic transfer union, and this weekend, local elections in Belgium saw the moderate Flemish nationalist N-VA party make substantial gains, using the €16bn a year that Flanders sends to the Francophone region as a political springboard. A leader in Belgian daily De Morgen notes that that the N-VA's objections to "the left-wing tax government of [Belgian PM Elio] Di Rupo don't differ that much from "the criticism in other countries of the [eurozone] solidarity mechanism which keeps the Greeks or Spaniards afloat".

Spain

In Spain, the Catalan independence movement is stepping up a notch off the back of Madrid (and Brussels) imposed austerity measures. In September, a pro-independence rally in Barcelona (pictured) mustered between 600,000 and 1.5 million people depending on whether you ask the Catalan or national police. The Catalan government has said it wants to hold a referendum on independence, with a majority of Catalans in favour according to some polls. A motion to permit a referendum was voted down by a majority in the Spanish lower house and could trigger a constitutional crisis if Catalan PM Artur Mas goes ahead with the plans regardless. Spanish Prime Minister Mariano Rajoy has said holding a referendum without the central government's approval would violate the Spanish Constitution.

Italy

The Lega Nord party has been calling for the separation of Italy's northern regions from the rest of the country. Possibly the main difference between the Italian case and the others, is the fact that the geographical entity evoked by Lega Nord (the so-called 'Padania', including all the regions above the Po river) has never existed as an independent state. Furthermore, Lega Nord has usually been more or less aggressive in its pro-independence claims depending on whether the party was in government or in opposition. Nonetheless, many northern Italians do feel that too big a chunk of the taxes they pay is then used to fund 'dysfunctional' Southern regions. Potentially one to watch, especially if Lega Nord (as it looks likely at the moment) will stay in opposition after next year's elections. 

Germany

While there is no talk in Germany of an independent Bavaria just yet, in July the regional government announced that it will launch a complaint at the German Constitutional Court against the German system of "Equalization payments" between richer and poorer German Bundesländer. Bavaria is the main net contributor to this system with €7.3bn, sharing the burden with only three other states - Hessen and Baden-Württemberg and Hamburg). The rhetoric of Bavarian politicians on the eurozone crisis has also been notably tougher than that of other German politicians as we've noted here. Meanwhile, a recent Bild poll found that 46% of Germans were against the separate West-East solidarity income tax levy compared with 42% in favour.

United Kingdom 

In Scotland the Scottish National Party has won its battle for a independence referendum with Scots being given a single Yes/No question on independence to be held in 2014. The prospects of Scotland becoming independent have however, in contrast to other regions, been damaged by the eurozone crisis with previously favourable comparisons with Ireland and Iceland being turned into examples of the problems of small economies with oversized financial services industries. Other questions that are beginning to be asked are whether an independent Scotland will use the euro (decreasing in popularity) or retain the pound, remain in the EU or have to have border controls. It has also been noted, including by the EU Commission, that Scotland would have to negotiate its EU membership afresh rather than opting in by default off the UK's entry in 1973.

Meanwhile in Brussels...

European Council President Herman Van Rompuy has presented a report calling for a central eurozone 'Treasury' with a shared budget and eurobonds - very close to a full-blown trasnfer union.

In Brussels, the logic seems to be that two negatives make a positive.

Spanish deficit: The saga continues

Keeping count of how many times Spain's deficit targets and forecasts have been revised has become a challenging exercise. Following the publication of its draft budget for 2013, the Spanish government has admitted that Spanish deficit at the end of this year will be as high as 7.4% of GDP - with the EU-mandated target fixed at 6.3% of GDP - once the potential losses on the government's recent cash injections in the banking sector are taken into account.

However, pending official confirmation from the EU's statistics body, Eurostat, it looks like aid to banks will not be counted in the Excessive Deficit Procedure (EDP) currently open against Spain. Speaking after his meeting with Spanish Prime Minister Mariano Rajoy yesterday, EU Economic and Monetary Affairs Commissioner Olli Rehn suggested,

It can be expected that this kind of element of increase in the fiscal deficit related to bank capitalisation will be treated as a one-off and will not affect the structural deficit.  

We would not be too sure that this settles the question, though. First of all, the EDP covers more than just the structural deficit while other one off impacts (such as Portugal's transfers from its pension funds) have counted towards reducing the deficit. Secondly, it will be interesting to see how Germany, Finland and others will react - given that, in practice, Spain has just said that it will fail to meet its deficit target again.

In the meantime, as we pointed out on this blog last week, the time for big decisions is approaching for Rajoy. The results of the stress tests have been published, and the draft budget for 2013 has been unveiled. In particular, both the European Commission and Spanish Economy Minister Luis de Guindos have stressed that the measures planned by Madrid for next year go "beyond" the recommendations Spain has been made under the new 'European Semester' - potentially paving the way for an EFSF/ECB bond-buying request without unexpected additional conditions attached to it.

Unsurprisingly, rumours of an imminent request have kicked off. According to a senior European source quoted by Reuters,

The Spanish were a bit hesitant but now they are ready to request aid.

With the next meeting of eurozone finance ministers taking place on Monday, this weekend looked perfect for Madrid to apply for an EFSF/ECB bond-buying programme. However, Rajoy reportedly told a meeting of regional Presidents from his party that he would not make the request this weekend. During a press conference less than an hour ago, he also replied with a curt 'No' to a journalist asking whether the request was "imminent."

The domestic political reasons for a delay in the decision (key regional elections in Basque Country, Galicia and Catalonia over the next two months, plus the obsession with avoiding humiliación) are well-known. Apparently, Germany is also standing in the way. Sources have suggested that the German government is keen to "bundle" Spain, Cyprus and Greece into a single dossier, rather than submitting individual aid requests to the Bundestag for approval.

Beggars cannot be choosers, and Rajoy cannot simply ignore Germany's reservations. Luckily for him, they could even turn out to be convenient on the domestic front. As in previous instances, though, the markets will likely play a big role in the timing of any bailout: a sharp surge in Spain's borrowing costs could certainly precipitate a request. Should this happen, Rajoy would find plenty of occasions to present a formal request for aid - the next one potentially being the EU summit on 18-19 October...  
 

Pressure mounts again for Don Mariano

Spanish Prime Minister Mariano Rajoy's trip to New York for the meeting of the UN General Assembly is coinciding with a particularly eventful week for Spain, on several fronts.

The Rodea el Congreso ('Encircle the Congress') anti-austerity rally outside the Spanish parliament building in Madrid turned violent yesterday, with 35 people arrested and 64 injured. The day before the rally, the Secretary General of Rajoy's party, María Dolores de Cospedal, recalled that the last time the Spanish parliament was 'encircled' was on the occasion of the failed military coup on 23 February 1981. The day after the rally, Spanish Interior Minister Jorge Fernández Díaz congratulated the police for handling the situation "magnificently". We assume these remarks have not done much to placate the protesters.

The demonstrations are clearly not good news for Rajoy and his cabinet. The Spanish government is due to unveil a new reform plan tomorrow, which may constitute the basis of the new Memorandum of Understanding, if (or should we say 'when'?) Spain decides to make its official request for EFSF/ECB bond-buying. As Rajoy himself anticipated in an interview with today's WSJ, the plan will include measures to cut the number of early retirements and the creation of an independent body in charge of monitoring Spain's compliance with EU-mandated deficit targets. Expect further protests fairly soon.

Meanwhile, the deficit of the Spanish central government stood at 4.77% of GDP at the end of August - with the target for the entire 2012 fixed at 4.5% of GDP. The Bank of Spain has this morning warned that, based on data available so far, Spanish GDP is continuing to fall "at a significant pace" during the third quarter of the year.

On the regional front, the rift between the Spanish government and Catalonia seems to be widening by the day. Catalan President Artur Mas announced yesterday that early elections will take place in Catalonia on 25 November. The autumn is going to be very tense, given that the Basque Country and Galicia will also hold early elections on 21 October. Crucially, Mas went one step further this morning, when he made clear that the Catalan people will be consulted on the issue of independence, with or without the authorisation of the Spanish government.

Furthermore, Andalusia's Treasury Minister Carmen Martínez Aguayo said yesterday that the region will “very likely” seek a bailout from the Spanish government. If confirmed, the request would be for a loan of over €4.9 billion. This means that Catalonia, Comunidad Valenciana, Murcia and Andalusia would, in total, need around 80% of the money in the bailout fund set up by the Spanish government to help all the 17 Comunidades Autónomas.

What else? Oh yes, in case you were wondering, Spain's borrowing costs are going up again. The interest rate on ten-year bonds is above 6% today.

In this context, it looks like Rajoy will not be able to hold out for much longer. The time for key decisions looks to be approaching - potentially marking a turning point for the future of Spain and the eurozone crisis. 

¡Cuidado, Señor Rajoy! The Catalans mean business (and the lesson is for the eurozone)

As we have noted before, whether you sit in Brussels, Berlin or Madrid - and like the idea of more central control - beware regionalism.

The relations between the Spanish central government and Catalonia seem to have reached a new level of tension in the past few days. Somewhat paradoxically, fresh from asking Madrid for a €5 billion bailout, Catalan leaders are starting to talk tough. There have been plenty of hints at independence - although the actual I-word has not been used in public speeches so far.
 
A pro-independence rally also brought Barcelona to a standstill on Tuesday, 11 September - when Catalans celebrate their national day, La Diada. In a perfect illustration of the forces of regionalism, local police said up to 1.5 million attended the rally, while the Guardia Civil (Spain's national police), cited 600,000 as a more realistic number. In any case, there were a lot of Catalans out on the streets.

Fueling the reinvigorated independence mood is Catalan Governor Artur Mas. The "success" of the pro-independence rally, he argued, shows that Catalonia can become "a normal nation in Europe" (during his speech he had only the Catalan and the EU flag behind him, see picture).

Yesterday, the Catalan Governor drew an interesting parallel with the eurozone crisis. He said,

"I think the same is happening between Catalonia and Spain as between northern and southern Europe. Northern Europe has grown tired of southern Europe. And southern Europe has grown tired of northern Europe because of its way of acting. I think that there is mutual fatigue between Catalonia and Spain, too. Catalonia has grown tired of not making progress and Spain [has grown tired] of Catalonia’s way of acting. Catalonia thinks it contributes a lot and is not respected. And Spain thinks Catalonia is always asking and complaining."

He said the time had come for a referendum on Catalonian independence, threatening early elections if Catalonia does not get greater tax collection powers. However, taking his eurozone parallell to its logical end point, he did not say whether the north and south in the eurozone should also opt for a divorce.

Because, as we have argued before (see here and here) and just as the Governor suggests (though, just to be clear, we're not taking any positions in the debate on Catalan independence!), Spain is a microcosm of what may be to come in the eurozone:

• Catalonia wants greater taxation powers since it feels that is losing out under the current system. Only two out of 17 Comunidades Autónomas (the Basque Country and Navarra) are allowed to collect all taxes by themselves, and then send part of the money (the so-called cupo) to the central government. If Catalonia gets the same deal, it says it will save cash. So Catalonia wants to opt out of most of Spain's transfer union. If Spain finds it difficult to hold its together, how much more complicated will it be for the euro to move to a transfer union - and then hold it together?

• And in a perfect illustration of what individual responsibility does: Basque Country and Navarra, the two regions that raise and spend most of their own taxes, are amongst the Spanish regions with the strongest finances (and likely to meet their deficit target at the end of the year). Catalonia is the has the highest debt/GDP ratio of all Spanish regions (see here).

Catalonia is not about to go independent. But this debate is a huge flashing warning sign for the eurozone.         
  

Spanish government vs Spanish regions: Episode 98,640 (and counting)

Fresh skirmishes between the Spanish government and some Spanish regions have taken place this afternoon, both ahead and during the meeting of the so-called Fiscal and Financial Policy Council - a forum for the Spanish Treasury Minister Cristóbal Montoro (pictured) to meet his regional counterparts.

The meeting is currently still under way, and the main item on the agenda is the 1.5% of GDP deficit target that Spanish regions will have to meet by the end of the year. As we argued in our recent briefing, the target seems unattainable for at least seven of Spain's 17 Comunidades Autónomas - which are expected to make cuts worth over 2.5% of their GDP.

Despite recently having its deficit targets relaxed by the European Commission, the Spanish government has refused to do the same for its regions. Reports in the Spanish press widely suggested that today's meeting was simply going to confirm that all regions will have to cut their deficits to 1.5% of GDP by the end of the year - even if this involves making additional budget cuts.

The government's decision has not gone down well with certain regions - to put it mildly. Thus, Catalonia this morning decided that it would boycott the meeting altogether. In the words of the Catalan government spokesman, Francesc Homs,

There's no point attending a meeting when everything has already been decided before.

Fair enough. But quite controversial, given that Catalonia is one of the three Spanish regions which have already declared that they will ask the central government for a bailout. Furthermore, Catalonia's minority government, led by nationalist Convergència i Unió party, is only able to govern with external support from Spanish Prime Minister Mariano Rajoy's Partido Popular.

And there is more. Andalusia - Spain's most populous region along with Catalonia - did go to the meeting with Mr Montoro, but abandoned the 'negotiating' table in protest against the government's decision to leave the 2012 deficit target for regions unchanged.

As we have argued here, regions will not make or break Spain financially. However, the latest events are yet another indication of how the clear difficulties in reining in spending at the regional level can undermine the Spanish government's credibility vis-à-vis its eurozone partners and the European Commission.

P.S.: Not really a regional issue, but still related to Madrid's credibility. The Spanish government was due to send its budgetary plans for 2013-14 to Brussels by the end of today, but has failed to do so. Perhaps not the biggest of deals, but the deadline was part of the agreement under which Spain was given an extra year to bring its deficit below 3% of GDP.  

Regional debt, national problem: Is Spain heading for a full bailout?

As Spain seems to have wiped anyone else away from eurozone crisis-related headlines, we have published a new briefing looking at how the Spanish crisis could evolve in the near future – focusing our attention on the role of the regions and potential bailout scenarios.

Forgive us a bit of self-praise, but we have repeatedly stressed the risks involved in Madrid being unable to rein in spending at the regional level (see here and here, for instance). In our new briefing, we argue that, at the end of the day, the regions alone will not make or break Spain financially (more likely, it will be the banking sector, a risk which we also highlighted at length). In fact, if they continue to rely on the central government for funding, this could increase Spain's financing needs for this year by an extra €20bn - not pocket change, but still around only 2% of the country's GDP.

However, further damages to the credibility of Mariano Rajoy's government vis-à-vis its eurozone partners would be inevitable. Furthermore, we believe regional problems combined with banking sector issues and other pressures could ultimately push Spain into a fully-fledged bailout.

But would there be enough money in the pot if this happens? 

Probably not. In fact, we estimate that taking Spain off the sovereign debt markets for three years in a Greece-style bailout would cost between €450 billion and €650 billion. This is both economically and politically impossible at the moment, given that the lending power of the eurozone's two bailout funds, the EFSF and the ESM, will only total €345 billion this year, and will rise to €500 billion in mid-2014.

Therefore, we suggest that the most likely scenario is a combination of measures, involving a precautionary loan of around €155 billion combined with a new bout of ECB liquidity. However, even that could, at best, only buy Spain six months to a year.

How long can Spain fund itself at these levels?

Once again the crisis came roaring back this weekend, with a terrible Spanish debt auction last week and rumours that a raft of Spanish regions will need aid from the central government (as we predicted here) sending Spanish 10 year borrowing costs skyrocketing to a record 7.55%.

The questions now turn to how long the central government can fund itself and its regions at these levels.

By all accounts Spain has done well to ‘pre-fund’ a large amount of its debt this year (meaning its already borrowed most of the money it needs to), while the average interest rate on its debt remains fairly low (around 4%) while the average maturity of its debt is around six and a half years – in all not a bad debt profile considering everything. However, around 10% is soon to be added to the debt to GDP ratio while the mounting costs of bailing out the Spanish regions will only exacerbate this. All the while growth continues to stall – the Bank of Spain announced this morning that the Spanish economy contracted by 0.4% in the second quarter of this year, to add to the 0.3% decrease in the first quarter.

Those of you that read our recent report on the Spanish bank bailout will know that we pre-emptively tackled this issue in detail, but just in case here’s a refresher from the report:

 …looking at the Spanish state’s funding needs over the next few years, even with the recapitalisation of the banks taken care of, it faces a huge level of debt refinancing. Up to mid-2015 Spain faces funding needs of €547.5bn, over half its GDP and a large majority of its debt.

Spanish debt maturing
The Spanish central government will need to rollover €209bn in bonds and €75bn in bills, equal to almost 30% of GDP and close to half of its official debt. This will become increasingly difficult if Spanish borrowing costs remain at elevated levels.

Spanish deficit 
From mid-2012 to mid-2015 Spain will have to finance a deficit worth €179bn – that is assuming it manages to stick to the IMF projections and its deficit cutting plans.

Unpaid bills 
Spain also faces large stocks of unpaid bills at all levels of government, totalling around €105bn. These are due to be wound down over the next year or two despite having been at elevated levels for some time. Ultimately these funds are mostly owed to domestic creditors meaning withholding the money for longer will be counterproductive for the Spanish economy. (In light of this weekend's  rumours its interesting to note that the recent boom in arrears came nearly exclusively from regional governments).

…the amount to be rolled over in the next year or two is still particularly large…This will further increase the pressure on the banks to load up on Spanish sovereign debt, with potentially huge consequences if this loop ever breaks down. If the problems in the banking sector are not resolved their ability to continue funding the state will at some point come under huge pressure, if this falls apart Spain may find itself without any willing creditors.

Lack of clarity plagues the Spanish government

Once again the lack of clarity coming out of the Spanish government has resulted in it getting a bashing by the press over the past few days, both in Spain and across Europe. The source this time was the press conference on Friday announcing the new €65bn in austerity measures – unfortunately at the time the government seemed unwilling to shed any light on exactly how and where these cuts will be made.

Fortunately, the Spanish press has published a paper circulated to foreign investors by the Spanish government, which fills in some questions regards the structure of the new fiscal consolidation programme (see here for the full document).

Despite providing some info, the doc remains fairly vague and raises plenty of questions, see our thoughts on the most interest points below:

·         The document lays out €56.44bn in savings. However, it is not clear where the remaining €8.5bn or so in savings - necessary to get to the total €65bn announced - will come from. El Mundo suggests that the additional money could come from changes to environmental and energy taxation; 

·         Around €9.22bn of consolidation looks set to come from savings due to increased efficiency in public services and efforts to reduce the public sector wage bill. There is little additional detail on how either of these will be achieved. We are particularly cautious over the ‘efficiency’ gains – there is no doubt that some are there to be made, but placing such a large amount of importance on such an uncertain area, without having conducted any discernible research on where savings could be made in this respect, seems overly optimistic at best;

·         A large amount of the savings is also meant to come from tax increases. This is despite the likes of the IMF and OECD often vocally supporting a more even split between tax increases and expenditure cuts, probably with more of the burden falling on the latter;

·         Furthermore, the rise in VAT is expected to do much of the legwork in terms of raising funds – around €22bn in fact. This in spite of Spanish Prime Minister Mariano Rajoy's previous pledges not to increase VAT. The potentially regressive nature of VAT is well known and with unemployment at record levels and large amounts of the population struggling to manage their finances, the move may not be well received and could be incredibly harmful. Increasing a tax on transactions could also dent consumer activity at a time when it needs to be boosted;

·         Much of the burden of implementation, particularly on the tax front, will fall on the autonomous regions. The disputes between the regions and the central government is well documented and could potentially lead to implementation problems, particularly since many of them may be more inclined to drag their feet on fiscal consolidation measures which could dent economic activity in their region.

Overall then, this is the most detail we have seen on the planned cuts but yet falls woefully short of providing a clear picture on how exactly the Spanish government will go about making the necessary savings within the necessary time frame. Given the huge questions surrounding  the Spanish bailout, many of which are out of the government’s hands, it’s more important than ever for the Spanish government to bring clarity to the issues which they can control.

An intense Eurogroup meeting for Spain

As expected, yesterday's was an intense Eurogroup meeting for Spain, with several key issues on the table. Here's a summary of what happened and what was (or wasn't) decided:

• Eurozone finance ministers reached a "political agreement" over the Spanish bank bailout. The final amount of the rescue package has yet to be nailed down, although Dutch Finance Minister Jan Kees de Jager has suggested that the Spanish government could eventually go for the entire €100 billion pledged by the Eurogroup (which, as we have previously noted, may not be enough);

• For the moment, it has been decided that Spain will receive a first tranche of €30bn by the end of the month. Eurogroup chairman Jean-Claude Juncker told the press that this money would be held as a "contingency in case urgent needs" arise in the near future;

• The money will initially go through Spain's national bank restructuring fund (FROB) and will therefore count as additional public debt. Once the eurozone has its single banking supervisor - not earlier than next year, according to both German Finance Minister Wolfgang Schäuble and ECB Executive Board Member Jörg Asmussen - Spanish banks will be allowed to get funds directly from the eurozone's bailout funds, and the debt will be written off the government's balance sheets;

• The loans will have a maturity of up to 15 years, and 12.5 years on average, Juncker said. Spanish Economy Minister Luis de Guindos (in the picture with Juncker) has suggested that the interest rate "could be even lower" than the 3-4% widely reported in the Spanish media during the past few weeks;

• The conditions attached to the rescue package remain unclear, as the Memorandum of Understanding will only be signed at the next meeting of eurozone finance ministers on 20 July - i.e. after the Spanish bank bailout passes parliamentary votes in Germany, the Netherlands, Finland and others. However, the Spanish press reports that the conditions will almost certainly include tougher capital requirements for Spanish banks and the creation of a big 'bad bank' to house the troubled assets held by the Spanish banking sector;

• Eurozone finance ministers also agreed to give Spain one extra year to bring its deficit below 3% of GDP. The revised deficit targets are: 6.3% of GDP (instead of 5.3%) for 2012, 4.5% of GDP (instead of 3%) for 2013 and 2.8% of GDP in 2014. In return for the extra year, Spain is expected to stick to the recommendations made by the European Commission earlier this year - which include, among other things, a VAT increase and stricter control over regional spending (the latter is much easier said than done, as we noted here);

• Despite the Spanish government consistently stating the opposite, los hombres de negro (the men in black) from the European Commission will indeed travel to Madrid every three months to assess how things are getting on.   

• On a slightly separate note, Spain came out as the big loser in yesterday's assignment of top jobs in the eurozone - possibly unsurprisingly, since it was also holding out its hand for huge amounts of aid. Luxembourg's Yves Mersch has been nominated to replace Spain's José Manuel González-Páramo on the ECB Executive Board – making Spain the only big eurozone economy not to be represented on the six-man Board. Madrid also failed to have its candidate – Treasury official Belén Romana García – appointed as chairman of the ESM, the eurozone’s permanent bailout fund. The post is to be assigned to current EFSF chairman, Germany's Klaus Regling.

Once the Memorandum of Understanding is finalised and made public, it will be possible to make a more thorough assessment. For the moment, once again, markets do not seem to have been impressed by the agreement - the interest rate on Spain's ten-year bonds remains around 6.9% this morning, very close to the 7% threshold widely seen as unsustainable.

Do not adjust your television set, this is not a Spanish rescue (despite looking an awful lot like one...)

Well, that was the line that Spanish Economy Minister Luis de Guindos was spinning yesterday. Sorry Luis, this is essentially a Spanish rescue - external funding sources filling a gap which the state can't (check), monitoring of a large chunk of the economy (check), involvement of all the big international organisations (check - EU, IMF, ECB etc.), the list goes on.

Meanwhile, the oft absent Spanish Prime Minister Mariano Rajoy held a press conference today, declaring the package a 'victory' for the euro and stating that if it were not for the current government's reforms it would have been a full bailout package. If this is a victory (finally dealing with a glaring problem after four years) then we don't want to see a defeat, but at least Rajoy made a public appearance this time. That said, in the midst of the worst crisis his country has faced since the financial crisis hit, Rajoy is now jetting off Poland to watch Spain vs. Italy (a mouth watering prospect admittedly but his timing could take some work), while the likes of the Education Minister are heading to Roland Garros to watch Rafael Nadal - the Spanish government not quite in crisis mode then, we're not sure if that should inspire confidence or not...

In any case, as we predicted over two months ago, European assistance to help Spain deal with its banks is now official, so what does this rescue mean for Spain and the eurozone, below we outline some of the key points and our take:

The plan
Spain will access a loan from the EFSF/ESM (the eurozone bailout funds) which it will use to recapitalise its ailing banking sector. The money will be channelled through the FROB (the bank restructuring fund) but will still be a state liability (it will not go directly to the banks). However, unlike the other bailouts it will not come with fiscal conditions but only conditions for reforming the financial sector.

Open Europe take:
Firstly, the ESM will not be in place in time to provide the loan (the treaty is yet to be ratified by numerous countries and has faced many delays) so at least initially it will come from the EFSF. As others have pointed out, this is important because ESM loans are senior to other types of Spanish debt while EFSF loans are not. This may make things easier to start with (as it removes the threat of legal challenges based on clauses in other Spanish sovereign debt which could be triggered if it suddenly became junior), however, Finland has already raised concerns over its exposure and role in the rescue - an issue we tackle in more detail below.

The lack of additional fiscal conditions is fair given that Spain is already subject to a deficit reduction programme and that this is ultimately a financial sector problem. There are questions over conditionality and moral hazard though - we would like to see bank bondholders and shareholders sharing more of the burden (bail-ins) to ensure the necessary reforms take place. As things stand its hard to see how the banks will 'pay' for this capital, particularly given the Spanish regulators previous failures (during and after the property bubble).

De Guindos confirmed that the funds would be counted as Spanish debt, so Spanish debt to GDP could be about to jump by 10% in the near future and given its current path this could put Spain over 90% debt to GDP (the level beyond which sustainability becomes questionable) much sooner than had been anticipated. This will require adjustments in its reform programme and lead to increasing market pressure.
 
Size - is it enough?
This is the key question - the total amount has been put at "up to" €100bn. That is much higher than was suggested by the IMF assessment released on Friday night, which suggested €40bn.

Open Europe take:
It sounds like a big number, but upon closer inspection it may not stretch as far as many expect. Consider that Bankia requires €19bn, while three other very troubled cajas need around €30bn (Banco de Valecia, Novagalicia and Catalunya Caixa) meaning half the money could already be eaten up, leaving only €50bn for the rest of the huge banking sector.

This compares to around €140bn in doubtful loans, and a total €400bn exposure to the bust real estate and construction sector. Doubtful loans to this sector total around €80bn currently, but we expect house prices to fall by a further 35%, broadly meaning that the number of doubtful loans could easily double. On top of this we have further losses on mortgage loans as well as losses on other corporate debt and a decrease in the value of Spanish debt held by banks. So huge number of issues - putting a clear figure on it is difficult due to the difference between tier one capital and 'loss provisions' (tier two capital). But even if this €50bn is given in tier one capital and stretched to increase provisions its hard to see that it will be enough given the huge exposure to mortgages and the bust sectors, especially at a time when growth is falling further and unemployment continues to rise.

Finland and Ireland - flies in the ointment?
If the EFSF is used (which looks likely) the Finnish government is obliged to ask for 'collateral' as it did with Greece - the noises coming out of Finland suggest it will, especially given its objection to 'small' countries bailing out 'larger' ones. Ireland has also suggested that if Spain is able to avoid fiscal conditions on its bank bailout then it could request similar treatment (i.e. a loosening of 'austerity').

Open Europe take:
The Finland issue will get messy, as it did in Greece. It will add another complex layer to negotiations, while politically it will help the (True) Finns who are already launching a campaign against further bailouts. It could also lead to legal challenges - as we pointed out with Greece, it could trigger 'negative pledge' clauses on Spanish bonds given that they essentially become subordinated to Finland's claim on Spain. Not guaranteed, but a legal grey area which adds to the confusion.

As for Ireland, they have a fairly strong case here. Ultimately, their fiscal troubles stemmed from bailing out their banks, something Spain is now able to dodge thanks to external help. Ireland already feels that it is paying a huge price for protecting the European banking system - this will only add to this ill feeling. Given Ireland's perceived 'success' in Germany some flexibility may be forthcoming but we doubt enough to assuage Irish anger.

Impact on the UK?
The IMF will only play a 'monitoring' role, meaning the UK will not be liable for the money provided to Spain. However, given the links between the UK and Spanish banking systems it is imperative that the problems in the Spanish financial sector are finally dealt with - whether that will happen this time around is yet to be seen but given the points above it is not off to a great start.

Impact on the eurozone - Open Europe concluding remarks:
Markets responded positively to rumours of external aid for Spain on Friday afternoon, but, given the points above, a huge amount of uncertainty remains which will keep markets jittery and increase pressure on the eurozone. That is far from needed given the uncertainty surrounding the Greek elections. Given the ongoing assessment of the actual needs of Spanish banks the rescue will now enter a state of limbo as attention turns back to Greece, in the meantime Spain is likely to find it difficult to access the market (since this is broadly an admission it cannot raise any substantial funds itself).

Questions will also arise over the strength of the eurozone bailout funds - Spain guarantees around 12% of them, surely its guarantees are now worthless or would do more harm than good. Additionally, now that one of the larger countries has asked for support pressure will intensify on Italy (particularly with the falling support for the technocratic government and the slow pace of reform).

Spain races against time

Things are looking sticky in Spain.

Firstly, the Spanish government announced a bail out of Bankia to the tune of €19bn in addition to the €4.5bn already put in - and is currently looking at the least painful way of getting cash to the bank. The plan is still up in the air. Yesterday there was talk about swopping government bonds for shares in the bank (Bankia could then use the bonds as collateral to get more cash from the ECB). This made a lot of people nervous, not least the Germans, who already worry that the link between states and ECB funding, via banks, is getting a bit too strong. Today's talk has instead focused on issuing bonds from Spain's specific bank bailout fund, FROB, to raise the cash Bankia needs.

Secondly, Catalonia - Spain’s wealthiest region - has asked the central government for financial assistance to repay its €13bn debt; bad news for the central government's debt and deficit. Thirdly, the the spread between Spain and Germany’s ten-year bonds reached its highest level since the introduction of the euro, with Spanish ten year bonds currently at around 6.4%.

There are a huge number of issues on the table here, but these events highlight three things that we pointed to in our April 3 briefing on Spain:

• Despite Spanish PM Rajoy's remarks to the contrary, it looks increasingly as if Spain is slowly realising that it may not be able to afford to directly fund Bankia or other banks that run out of cash. And the numbers could well go up. This, in combination with talks and leaks over recent days that European money will be needed to backstop the Spanish banking system (Rajoy is very keen on more from the ECB), indicates that Spain is now moving ever closer to bank bailout via the EFSF.

• A huge battle looms over the finances and economic autonomy of Spanish regions, that remain a massive liability for the central government's attempt to cut its debt and deficits.

• Spain is racing against the clock. Naturally it will take time for the structural reforms that Spain is pursuing to have an impact - time that markets just won't give it at the moment.

Instead, it looks as though that time may soon have to be bought by eurozone taxpayers.