Notwithstanding incredibly perilous financial circumstances, the Rajoy government deserves credit for its determination to attempt to steady the Spanish ship.
For instance, it has been announced that 16 of the 17 regional governments have had their budget plans approved by the Spanish government, agreeing to EUR 18.3 bn of spending cuts and revenue-raising measures in the process. As Budget Minister Montoro conceded, implementing these cuts is the next challenge. Last month, the law was changed in Spain to allow the central government to intervene in the fiscal affairs of the previously very independent regional governments. However, the latter has been unable to access funding in the capital markets, forced therefore to accept guarantees and other types of financial assistance from the central government. The aim is to reduce the overall budget deficit in Spain to 5.3% of GDP this year, although the way the economy is floundering it may well be that the final fiscal shortfall is nearer 7%.
Despite its best endeavours, it is abundantly clear that the recession in Spain is worsening. According to the Bank of Spain, non-performing loans rose to 8.37% of total lending in March; apparently bad loans rose by an incredible 90% in the year ended Q1. NPLs in Spain now total EUR 147bn. Little wonder that Moody’s decided to downgrade 16 Spanish banks yesterday.
Unfortunately, the financial holes appearing in Spain are becoming cavernous.