Very few would want to swap places with Spain’s incoming Prime Minister, Rajoy, who takes up his new post on December 21 after winning the national election last month. The benchmark 10yr bond yield has fallen sharply over recent weeks to just over 5.0%, from a high of 6.75% just a month ago. Even so, the financial challenges facing Rajoy would frighten a lesser man. The unemployment rate is a staggering 21.5% - back in 2007, it was just 8%! In addition, the economy is flirting with recession, the consumer has gone into reverse and industrial production is falling.
Spain’s fiscal difficulties are hardly easing, despite some very creditable fiscal initiatives. The budget deficit in 2010 was 9.3% of GDP, a long way from the target for this year of 6% and 4.4% for next year. Moreover, these figures do not include those pesky 17 regional and 8,000 municipal governments, whose access to credit is now almost non-existent. Indeed, much of the Spanish economy that deals with these municipals is being mercilessly squeezed by the inability of the latter to gain access to liquidity. According to one employer group, it is taking an average of five months for companies to get their invoices. Rajoy has promised to help out, although how he can do this without adding to an already large government debt pile remains to be seen. Meanwhile, the crippling waiting time is acting like an anchor on an economy that is already struggling.
We can expect to hear much more about Spain’s mounting financial bills next year. It will not be easy listening.