Welcome to a live blog with analysis and comment from FT experts as Spain’s cabinet gives details of a savage budget that will determine the immediate future of the country and relation with the rest of Europe. Watching closely: Eurozone partners; central banking institutions; the Spanish people; regional separatists, to name a few. Strong reaction is expected, from the market and the street, to further austerity measures. David Gardner, John Aglionby and Ben Fenton are collating the best of it.
18.22: FT experts are retreating into their fastnesses as we write to deliver cogent and considered views on what the Spanish government’s actions mean, and we live desk types gird our loins for the next challenge. Until then, que no hayan novedades, as they used to say in Spain.
18.06: Peter Spiegel has sad news from Brussels for friends of the European Financial Stability Facillity:
While it is unlikely to be mourned, and there are no plans we know of for an FT obit, it was, in its full form, popular with macro-economic rappers. That “stability-facility” thing, just magic.
18.03: Currency market reaction to the Spanish budget from the FT’s Alice Ross, reminding us that there is more news to come tomorrow, principally on how much Spain’s banks need to recapitalise.:
After hitting its lowest level all day during the Spanish budget, the euro later recovered and was trading just under $1.29, a 0.2 per cent rise on the day. Other currencies related to risk appetite built on their gains, with the Australian dollar rising 0.8 per cent, the New Zealand dollar rising 1 per cent and the UK pound rising 0.4 per cent.
Currency analysts said the rise in the euro was perhaps more related to the removal of uncertainty following the highly anticipated budget, rather than an enthusiastic thumbs-up for the proposals. And the euro is not out of the woods yet, with the results of Spain’s banking stress tests tomorrow set to indicate how much Spain’s banks need by way of recapitalisation.
18.00: Very interesting post from Lisa Pollack over in FT’s Alphaville community, on whether capital flight from Spain is as straightforward as it seems to be.
17.56: Hold up, just a bit of news in at the end there. Montoro, the budget minister, refused to comment when asked whether Spanish state pensions would rise in line with inflation next year. A fairly significant “No Comment”, one would imagine.
17.54: In fact, according to @cataloniadirect, the Catalan parliament has just approved calling a referendum on independence. That is hardly likely to be the last word on the matter, but it does suggest that we haven’t heard the last of that story by a long chalk.
17.52: But, just as Chris Adams thinks it’s all over…it is now. Spanish government’s press conference has now ended. We may have a bit more market reaction for you though, so hang in for a bit.
17.50: FT still with its finger firmly on the pulse:
17.47: Channel 4′s Alex Thompson suggests there may be bit of a protest beginning.
17.40: So, 90 minutes in and the Spanish ministers are still fielding questions, so here are the thoughts on what we have heard so far from the FT’s international affairs editor, David Gardner, who has been sitting at the live news desk all the way through.
As my colleagues Miles Johnson and Peter Spiegel have observed, it was indeed interesting how de Guindos kept insisting that everything he was announcing in terms of structural reforms was four-square with EU recommendations.
If Spain does indeed end up having to seek EU rescue funds, one understands the political imperative of pre-empting conditionality with a euro-friendly but “Made in Spain” package. But the Rajoy government seems ultra-fixated with the political price of a bail-out, but less so with the popular backlash already underway against austerity. The laid-back and long-winded way in which this latest austerity package was announced is unlikely to improve the public mood.
17.33: And gold is recording the same sort of reaction, in its quietly eloquent way:
17.30: Euro news from FT’s Alice Ross:
17.26: Peter Spiegel is winging over the first reaction from the big guns in Brussels:
Out of Brussels, a strong endorsement by Olli Rehn, the EU’s economic chief. In a statement just released by his office, Rehn calls the Spanish reform plan “concrete, ambitious and well-focused”, noting that it follows recommendations made by the European Commission earlier this year.
“The reforms are clearly targeted at some of the most pressing policy challenges,” Rehn said, singling out labour market reforms and the establishment of the new “Fiscal Council” to further liberalise professional services as particularly important. Spain is facing important challenges to correct very sizeable macroeconomic imbalances which require a comprehensive policy response. The measures announced today are a further important step towards addressing these challenges.”
17.23: The revolution has been postponed for the moment, according to Channel 4 correspondent Alex Thompson, who is outside the Spanish parliament:
17.20: For those wondering what all the fuss is about Ferraris, here is a reminder, presented to you not least because illustrating budgets is not all that easy.
Complete with the aforementioned Ferrari chairman, Mr di Montezemolo, leaning on their latest creation.
17.17: David Gardner observes:
The budget crisis doesn’t seem to be bothering Spanish journalists – who are now questioning the three ministers- as much as the potential constitutional crisis, with Catalonia threatening secession. Sáenz de Santamaría was asked whether the government had legal means to stop the Catalans from holding a referendum on independence.
Her studied reply was: “Not only do instruments exist to prevent [a referendum], there is a government here that is willing to use them.”
17.12: An interlude from Madrid, over to Italy and more news from FT motoring correspondent John Reed on why Italians have stopped buyng Ferraris, straight from the horse’s mouth:
Ferrari’s chairman says that sales the Maranello brand’s cars are down 50 per cent in Italy this year as Italians cut back on conspicuous consumption.
Luca di Montezemolo says that he expects the carmaker’s sales to halve to just over 300 this year, from 600 in 2011, as Italians react to higher taxes and the new government’s crackdown on tax evaders.
“It’s psychological,” Mr Di Montezemolo told the Financial Times in an interview at the Paris auto show. “People say, ‘I’d rather wait and buy a Ferrari next year.” The same sentiment is depressing sales of other luxury goods in Italy, including yachts. “The boats are zero,” a dapperly dressed Mr Di Montezemolo, dressed in a tie emblazoned with a
prancing horse, says with a shrug.
17.07: And a summary from our own Peter Spiegel, Brussels bureau chief:
Luis De Guindos, the Spanish finance minister, has taken the floor at the press conference in Madrid and his language is interesting – he repeatedly stresses that everything they’re announcing is in line with EU recommendations.
This is basically a code word: by hewing close to recommendations made by the European Commission, both Brussels and Madrid believe that, if a request for bailout aid comes, eurozone lenders will not impose more onerous conditions on them in return for the assistance.
17.05: A two-line summary from Paul Mason, economics editor of BBC Newsight:
16.59: Miles Johnson from Madrid comments:
Guindos repeatedly stressing how each reform is in line with European recommendations
16.58: Luis De Guindos, finance minister, announces measures to dissuade people from taking early retirement, rather than do anything more radical, such as raising the age from 65 to 67, as had been predicted in some quarters.
16.54: The government wants its people to take away the message that with all the spending cuts, just under 64 per cent of its budget will still go on what it calls “social spending” – pensions, benefits, etc.
16.52: Also in the mix were figures stating that the tax take next year would rise from €170bn to €175bn. Government ministry spending will fall by 8.9 per cent, or about €40bn.
16.49: Markets are not liking this. Here is FT Markets editor Chris Adams again on a big rise in gold prices:
16.47: More seriously, Montoro says the interest bill on Spain’s public debt will rise next year from €28.8bn in 2012 to €38.6bn. David Gardner comments that is higher than expected and will wipe out almost all the increased take from VAT and already looks optimistic.
16.45: Absolutely terrible news for Spaniards: in future, lottery wins over €2,500 will be taxed for the first time at a rate of 20 per cent. Imagine what that will do to El Gordo. Simultaneously, a tax on the rich and the poor. Says it will raise €824m. Hope it doesn’t spread as an idea.
16.43: There is some confusion about the pension fund raid (see 16.36), so we will check and get back to you about what it means.
16.38: As the Euro weakens to a session low to 1.2838, Chris Adams tweets from the FT market team:
16.37: The government believes unemployment has bottomed out and is predicting an average rate of 24.3 per cent for next year.
16.36: The government will also put its hand into the state social security reserve fund to remove €3bn in order to cover liquidity problems in Spain’s old-age pension system.
16.34: The cuts are aimed at cutting Spain’s budget deficit by €40bn in 2013.
16.32: Cristobal Montoro, budget minister, said he sees a “soft recession” in 2013, which he hopes will be the last year of the crisis. The actual growth number is -0.5 per cent.
16.30: Miles Johnson says the budget consists of 58 per cent spending cuts and 42 per cent increased taxes.
16.27: David Gardner observes: She just spent five minutes talking about a car-scrapping scheme and five minutes on a milk scheme. No wonder cabinet meetings take so long.
16.24: El Mundo reporter Pablo Rodriguez is underwhelmed so far:
16.22: She says they will concentrate on cutting spending rather than raising taxes and there will be 43 new laws aimed at improving the health of the economy. They are meeting commitments to Spain’s European partners Sáenz de Santamaría says.
16.18: There will be a new independent budgetary authority which will monitor deficit reduction and government spending, says Soraya Saenz de Santamaria, deputy prime minister and Spanish government spokeswoman.
16.16: Our markets editor Chris Adams tweets:
16.09: And we are off: the announcement of Spain’s budget measures is underway. Live analysis upcoming.
15.57: In the absence of news, conspiracy theories arise over the delay in the budget announcement in Madrid, according to the FT’s Alice Ross:
While Peter Spiegel, Brussels bureau chief, is catching up on his celebrity news:
15.43: James MacKintosh says in his Short View video today that in delaying a call for a bailout, politicians are merely responding to the distorted market signals created by central banks, but it is time they took the unpalatable decisions, before they receive another market mauling.
15.36: Not quite Spain, but…there is quite a buzz in Italy over remarks by prime minister Mario Monti, who of course was not elected but appointed, that imply he is ready to continue in post even after elections due next year.
Giulia Segreti reports his words from the FT@s Rome bureau:
“Should there be the circumstances in which (Italian parties) believe I could helpfully serve the government after the elections, I will be there,” but also added that he does not “foresee that a second occasion will be needed”
15.14: Another potential victim of Spanish austerity could be the 2014 world road race cycling championship. Jennifer Hughes, FT Lex writer and cycling enthusiast, found this article in one of those magazines with glossy pictures in it.
14.54: One theory in the FT newsroom is that the Spanish cabinet delay is due to Spain’s top ministers being glued to the exciting finish in the Sri Lanka v New Zealand 20-20 cricket match. Have to say that is not a theory getting much traction.
14.40: LATEST: Miles Johnson is now saying the announcement will be at 1700 Madrid time, 1600 BST.
14.36: Hands up who knows what the Fondo de Liquidez Autonomica is? You will soon, because all you need to know on Spanish regional debt is here in a latest comment from international affairs editor David Gardner:
Today may, or may not, see a government announcement that the Fondo de Liquidez Autonomica – a liquidity fund to help Spain’s 17 regions meet their debt schedules and payroll obligations – is at last up and running.
Announced originally in July, by the time it starts functioning its entire €18bn endowment may have been accounted for. The dance card is filling up fast.Castilla-La Mancha, a region run by the ruling Partido Popular, just became the latest petitioner, seeking €850m. This adds to requests from nationalist-run Catalonia (€5bn), Socialist-governed Andalucia (€4.9bn), Valencia – arguably the worst-run region in Spain, also under PP control (€4.5bn), and in light of these sums, the almost incidental request for €600m from little Murcia. That leaves a little over E2bn left in the kitty – once it arrives.Total regional debt is just over €150bn (on total Spanish public debt of just over €800bn), with about €38bn maturing this year.
14.16: Hot scoop in from Miles Johnson in the FT’s Madrid bureau: the delay in today’s critical cabinet meeting there was caused by PM Mariano Rajoy arriving back a bit late from New York, where he had been attending the UN general assembly. Excuses, excuses!
14.13: Chart enthusiasts may enjoy this collection of the current state of the € in relation to the pound, yen, Swissie and the $. Seems while waiting for Rajoy, traders are killing time by killing the Euro (a little).
13.58: Markets update. The market seas, that were stormy yesterday, are still relatively calm despite the poor US GDP number. Jamie Chisholm, the FT’s global markets commentator writes:
Risk assets have stabilised after their midweek wobble, as a more stoic assessment of the latest surge in eurozone fiscal tensions takes hold.
13.50: Gloomy US news alert: The world’s biggest economy grew at an even more anemic pace than previously thought in the April-June quarter. The commerce department said the economy grew at 1.3 per cent rather than 1.7 per cent. The revision was mainly because the government slashed its estimate of crop production by a whopping $12bn, although other areas were also weaker. Growth in the first quarter was 2 per cent.
13.40: Miles Johnson, the FT’s Madrid correspondent, says we’re unlikely to get the Spanish budgetary version of Vatican white smoke at the top of the next hour, as previously suggested. One official told Miles the press conference might not happen until 4pm Madrid time (3pm London time). The official then delivered the understatement of the month year:
“They have a lot of things to talk about.”
13.30: Below are some recent Spanish 2 and 10-year yield graphs and a European equities chart to boot:
13.24: As it happens, you should have plenty of time to appreciate David Gardner’s wisdom below as Reuters is reporting there has been a delay in Madrid. The cabinet is still sitting and the earliest we can expect an announcement is 1300 GMT, an hour later than was being hinted earlier.
13.21: While we are waiting, here is David Gardner, international affairs editor of the FT, with his authoritative take on what we are about to receive from Senor Rajoy, (and an exclusive for this blog):
This new round of budget cuts and tax increases, amounting to nearly €40bn after July’s record €65bn austerity package, is beginning to make it look as though the Spanish economy is desperately trying to walk up a down escalator that keeps speeding up.
Leaked details of the 2013 budget suggest that, grim as it is, the figures may prove optimistic. That has pretty much been the story all along. In the first half of this year, for example, unemployment outlays rose by 5 per cent, whereas the Rajoy government had budgeted for a fall of 5 per cent for the year as a whole. That is not a small detail in a job-destroying economy where there are now only two people in work for every pensioner (roughly 16m in work for 8m pensioners).In the package to be announced today, similarly, almost the entire increase in revenue from VAT increases, roughly E10bn, will be eaten up by the increase in the interest bill on Spain’s fast-rising national debt – expected to climb this year by about that amount to €38bn. And the entire calculation is predicated on a fall in economic output next year of about 0.5 per cent of GDP. Even though Brussels has given Spain an extra year to start hitting its budget deficit targets, that could still prove optoimistic.Overhanging all this, whatever the precise numbers turn out to be, are a series of question marks:– we should know tomorrow when Spain makes public the result of the audit of its banks what size of hole needs to be filled – the government has forecast €60bn – but thus far not one cent of the €100bn promised in June for the Spanish bank bail-out has materialised– meanwhile, more doubt has been cast on the June summit’s decisions; a German-led caucus of eurozone finance ministers is suggesting that “legacy assets” (past bad bank debts) will stay on the sovereign’s books – really bad news for Spain’s chances of financing itself through the bond markets– raising the biggest question of all: will Spain apply for a full eurozone rescue programme, and if so when? Mariano Rajoy is giving no hints.
13.17: More austerity examples, although a little different from scavenging in Spanish bins, from @zerohedge:
13.14: Here in graphic form is an explanation of the issues at stake in Spain, from FT.com today:
A full size version is here, for those who don’t have a microscope handy.
13.03: And here is some fascinating reporting on the real effects of austerity measures in Spain: the New York Times says there has been a dramatic rise in scavenging among the Spanish population.
13.01: The FT is running an excellent Q&A on what is happening in Spain, written by Tony Barber, which you can find here .
12.50: A taste of existing attitudes in Madrid. Who knows how glum he will look by this evening?
12.48: Kathleen Brooks at Forex.com has a few things to look out for from the announcement:
1. Whether or not Rajoy formally announces that Spain will either apply for a bailout or a line of credit that comes with enhanced “conditions”. We doubt this will happen as it could ignite even more social tension after two nights of protests in Madrid.
2. What he may say instead is that the government has worked with the EU on a raft of economic reforms including labour market reform, social security reform etc. This could be Rajoy’s way of announcing a bailout by the back door.
3. Watch out for the reform package to see if it is social gunpowder. Freezing public sector pay, a reduction in pensions and a decline in unemployment benefits could go some way to making another EU39bn of cuts next year in order for Spain to meet its 4.5% fiscal target, but it may also cause another round of violent protests, which could dampen market sentiment.
4. We know that Spain’s budget deficit rose to over 4% of GDP by July of this year, which suggests that the 2012 deficit target will be missed. It is worth watching to see if Rajoy announces any measures to get the deficit back on track for the rest of 2012. This would require austerity and we don’t think the government has the stomach to announce fresh cuts when the build-up to this Budget has been so inflammatory. He will probably stick to 2013 plans at the press conference.
However, if Rajoy doesn’t address the problem of fiscal slippage then it’s hard to see how Spain can meet its 4.5% target for next year without more harsh austerity measures. It’s unlikely that the EU authorities will widen the target for Madrid, so this Budget may end up being null and void based on unrealistic assumptions like growth rates and miss-able fiscal targets.
12.44: As we wait for Spain, there is news from Greece, according to AP: “Greek Finance Minister Yannis Stournaras says the heads of the three parties in the governing coalition have reached a “basic agreement” on an austerity package for 2013-14.”
Coming a day after the protests in Athens, these cuts are necessary and urgently so for Greece to continue to receive bail-out funds.
12.39: Among other elements of uncertainty today is the timing of the Spanish cabinet announcement of what has been passed by way of budget measures. We believe it to be due at 14.00 Madrid time (1300 BST), but there is some indication it may slip.
12.36: Paul Murphy, Alphaville supremo, has a scorching first take on what is at stake in the next two days as the markets’ focus turns to Madrid.
Here’s his first lines, but the rest is compelling reading too:
While Athens burns and Spaniards march, catching all the headlines in the process, Alex White of JP Morgan would seem to have identified the real reason market nerves across Europe are a-jangle once more…
“The divisions over whether the ESM should shoulder the burden of existing impaired bank assets is a serious one, and could get worse. It reflects the problems of the key European Summit in June, which set the parameters for the progress the region has since made. The Summit communiqué bridged disagreement about whether burden sharing should happen – but it achieved this largely by being incoherent. The periphery (Ireland in particular) went away convinced that they could socialise the debt burden they had incurred by supporting their domestic banking systems, that bank recapitalization payments could take effect in the near-term and be applied to existing troubled assets. The core countries went away thinking that they had committed to no such thing, but that work should be done to disentangle sovereign-banking sector feedback loops in the future institutional design of the region. This misunderstanding reflects the danger of mixing the discussion of tactical issues – how to deal with the current Irish or Spanish debt burden – from strategic issues, like Germany’s desire to build a new permanent architecture for EMU. It also reflects the dangers of trying to reach complex agreements at 4.00am.“
Peter Spiegel has the backstory on this.
There’s already been plenty of analysis in advance of the budget details being released.
Here is Citi’s Valentin Marinov, currency analyst, on the basic questions:
Many investors will view the planned fiscal savings and structural reforms as integral parts of any future bailout package for Spain. In this regard, potential omissions could be seen as potentially jeopardizing government fiscal deficit target of 4.5% of GDP for next year.
Citi’s economists have identified the extension of retirement age from 65 to 67 years, a freeze of on public sector employment as well as partially severing the link between pension indexation and the rate of inflation as savings measures needed to achieve the 2013 fiscal deficit target. In addition, a number of structural reforms aimed to improve the long-term competitiveness of the Spanish economy are expected to be announced.
If the Spanish government does not include some of these measures later today, potentially in response to the growing backlash against fiscal austerity, this could mean that any future bailout negotiations could be more strenuous and protracted. We think that indications that the Spanish parliament may struggle to approve further aggressive austerity measures during its budget hearing on Friday could work in the same direction. Subsequently, this could add to the headwinds for the single currency across the board.
On Friday, the independent consultancy Oliver Wyman is due to release results of its review of the Spanish banking sector, putting a number on how much is needed to shore it up. The market is betting on around €60bn. Much higher, and the currency could come under pressure because of fears there are unknown problems with the banks. Much lower, and markets will question the credibility of the exercise undertaken by Wyman.
On Wednesday, Spanish borrowing costs rose and stock markets fell. This morning, according to the FT’s Jamie Chisholm in his Global Market Overview, there is a relative calm before the possible storm.
He writes that the FTSE All-World equity index is up 0.3 per cent as the FTSE Eurofirst 300 is seeing a gain of 0.3 per cent – after falling 1.7 per cent yesterday. Asia bounced 0.8 per cent earlier in the day. Jamie adds:
Conversely, the recent “haven” rally has been halted, with money moving out of US Treasuries to force 10-year yields up 2 basis points to 1.63 per cent.
The political situation is not getting any better, though, according to Miles Johnson in Madrid and Ralph Atkins in London
Capital flight from the Spanish banking sector continued in August, data released on Thursday showed, putting more pressure on the prime minister, Mariano Rajoy, as he unveils his crucial budget for the next year amid rising borrowing costs and growing public discontent with austerity.
They add:
There was more trouble for Mr Rajoy in the regions when Castilla La Mancha, run by his centre-right Popular party, requested a €800m bailout from the central government. Castilla La Mancha is the fifth of Spain’s heavily indebted regional administrations to request financial assistance from Madrid.
The political turmoil continued to put pressure on Spanish stocks, with the Ibex share index falling 0.6 per cent on Thursday morning. On Wednesday, events in Spain triggered a sell-off of European shares as investor concerns mounted about the eurozone’s fourth-largest economy.
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