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. 

The French Court of Auditors publishes its annual report: Little good news for Hollande

The French Court of Auditors has published its annual report this morning. It is an absolutely massive document, but we have dug out a few interesting findings and recommendations - many of which do not exactly make for happy reading for French President François Hollande and his government:

• According to the Court, France's public deficit for 2012 will "in all likelihood be close" to the target of 4.5% of GDP. However, the report warns that "important uncertainties remain" over the final figure, which is only due to be disclosed at the end of March. Therefore, "a deficit higher than 4.5% of GDP cannot be ruled out."

• Unsurprisingly, the Court stresses that the government's growth forecast for 2013 (+0.8%) is much more optimistic than those made by the IMF, the European Commission and the OECD - which all agree on 0.3%. The 0.5% difference, estimates the Court, could mean 0.25% of GDP increase in the deficit by the end of 2013.

• Crucially, growth forecasts have an impact on revenue estimates as well - especially when it comes to tax and social security deductions (which the French call prélèvements obligatoires, compulsory deductions). The French government is betting on a 2.6% increase of this type of revenue for this year - again, far too optimistic. Tax and social security deductions, the Court explains, are closely linked to how much the economy grows, and have a significant level of 'elasticity' - meaning that they may well be lower than expected even if (and it's a big if by now) the French economy were actually to grow by 0.8% in 2013.

• The Court concludes that the structural deficit targets (which are relevant under the fiscal treaty and the so-called Excessive Deficit Procedure) are "attainable". However, the nominal deficit target of 3% of GDP for 2013 is "very weakened" by the slowing down of the economy. 

• On the recommendations side, the Court notes that the French government's deficit reduction effort has relied too much on tax hikes. Therefore, the Court argues, "Stepping up the efforts to rein in spending in the public administration as a whole is now the absolute priority. In fact, the structural [deficit reduction] effort for 2013 is unbalanced: it relies on public spending control for less than 25%, and over 75% on increases in mandatory deductions." 

Some fairly damning assessments then, and we have only scratched the surface of the report. This is also not the first time Hollande has faced this type of criticism from the Cour de comptes. The French Economy Ministry has responded to the report, saying the government sticks to its targets for 2012-13, but will "reappraise" its growth forecast in the new stability programme, due to be submitted to the French parliament in mid-April. Could this be the first step towards a public admission that France will miss its 2013 deficit target?           

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...