FT Alphaville " A Spanish shopping list [updated] These are from a chart-heavy Nomura note (which is in the usual place) and are a nice lead-in to Spanish prime minister Mariano Rajoy's soon to be announced budget - due around 1300 London time (now pushed back by at least an hour) on Thursday. Some details from Reuters: Reforms intended to win over sceptical investors and control spending are likely to include a new tax oversight body as recommended by Brussels, curbs on early retirement, new taxes on greenhouse gas emissions and stock transactions, and scrapping some tax exemptions. Business daily Expansion, citing official sources, said the government would save up to 1.5 billion euros (1.1 billion pounds) by weeding out corporate tax breaks, including reinvestment incentives and exemptions on foreign earnings and dividends. According to Juan Jose Rubio Guerrero, president of the Independent Forum of Fiscal Analysts, tax breaks are worth 38 billion euros in Spain. Wage freezes for public employees will also be extended into 2013, trade union sources said. Cuts in department budgets would range from 4.2 percent at the Justice Ministry to 30 percent at Agriculture, news agency Europa Press said, citing government sources. Other media said the Public Works Ministry would reduce spending on infrastructure by nearly a quarter, while the Culture Ministry budget would be cut by a third. And a reminder that Spain is revealing results of an audit of its financial sector on Friday - an exercise which Santiago López at BNP Paribas referred to as "the Don Quixote approach to valuation" as the Ministry of Finance has already indicated no listed bank, aside from Bankia, will need new capital under the tests, even though they use aggressive economic assumptions. The investors and analysts that Madrid is anxious to convince, however, are already questioning the integrity of the latest review, with some arguing it is likely to resemble a stage-managed announcement with few surprises. Mr Guindos has said that the final amount of total capital required is likely to come in at about €60bn, which is close to a provisional estimate of between €51bn and €62bn made by Oliver Wyman and fellow consultant Roland Berger in June. While Santander and BBVA, Spain's two largest lenders, have international operations that have helped them diversify away from a weak Spanish economy, others such as La Caixa and Banco Popular are almost completely exposed to a recession-hit domestic market. "Spanish banks are not giants but windmills," Mr López says. The assumptions of the tests seem reasonable but the conclusion is not credible. Some thoughts from JPM's Raphael Brun-Aguerre (with our emphasis): As Spain presents its 2013 budget today, important questions remain about the fiscal outturn in 2012. In our view, some slippage looks likely. The general government deficit does not show any sign of improvement in 1H12 with respect to the same period last year, and the central government budget balance through August is not encouraging neither. However, corrective measures worth €62 billion, or about 5.9% of GDP, have yet to fully impact the data. Taking these measures into account, and assuming that some slippage is likely in the current recessionary environment, we think the deficit will likely print close to 7.0% of GDP, instead of the 6.3% assumed by the government. The details of the quarterly budget so far Looking at the numbers, we can see that the cumulative general government deficit reached 1.5% of GDP in 1Q12, and 4.3% of GDP in 2Q12. These numbers are actually slightly worse than the cumulative deficit of 1.4% and 3.8% of GDP seen in the same period last year. Putting this into perspective, the 2012 numbers so far indicate that the annual run rate of the general government deficit is about 8.6% of GDP, or 2.3%-pt higher than the government objective of 6.3%. In the details through June, the largest share of this deficit was driven by the central government deficit of 4.5%, while autonomous regions did run a small deficit of 0.8%, and the local government and social security balances were positive at 0.1% and 0.9%, respectively. One important thing to bear in mind, however, is that the central government transfers money to the autonomous regions. At the end of June, the cumulative transfers to the regions reached €13 billion (on a cash accounting basis), but is not clear how much the central government received from the regions. What can we learn from the monthly central government budget? From this perspective also, the budget outturn so far does not look encouraging. The cumulative central government deficit reached €50.1 billion at the end of August this year, or 4.8% of GDP. This compares with a €40.5 billion deficit reached at the same point last year, or 3.81% of GDP. But these numbers are distorted by fiscal transfers from the central government to, mainly, autonomous regions. The Treasury publishes a cumulative central government deficit corrected from fiscal transfers. In August, that number reached 4.3% of GDP, which means that the run rate for the year so far is 6.5%. This should be compared with the 4.5% deficit target assumed by the government (this target also includes the budget balance from various organizations but these only have a marginal impact). What about the corrective measures? Spain has announced a number of measures over the recent months in order to achieve its budget target by year end: the 2012 budget was published in April and included measures worth €27 billion; a new plan for the regions was decided in May with the objective to generate €18.4 billion; local government are also expected to contribute €3.1 to the general budget; and additional measures worth €13.5 billion were decided in July. The total amounts to €62 billion of measures for 2012 only, or about 5.9% of GDP. How these measures will affect the deficit outturn this year is not clear. They could not impact the 1Q12 number as they were decided later on in the year. But some effect should have been seen in 2Q12 as measures worth €27 billion were already decided in April. What is certain is that a much larger share of fiscal tightening is yet to be seen in the numbers. An attempt to square these numbers could be done in the following way. We can assume that a third of the measures decided in April have already been seen in 2Q12. We are then left with €53 billion of extra measures, or roughly 5% of GDP, to impact the budget in 2H12. We can then assume that the annual run rate of the deficit in 2H12 is similar to the run rate seen in 1H12 (corrected for tightening measures in 2Q12), i.e. 9.6% of GDP, minus 5%-pt related to fiscal tightening to get a deficit of 4.6% in 2H12. The average deficit for the all year would then be 6.6% of GDP, or close to the 6.3% target assumed by the government. This is the way we should understand how Marta Fernandez Curras, secretary of state for the Budget, could say earlier this week that the "deficit is in line with previsions and will decline from now on to the end of the year" (she only referred then to the central government deficit). The main issue here is implementation risks, especially in an economy that is facing a deep recession (the GDP government forecast for 2012 is -1.5%oya). It is unlikely that the Spanish government will actually manage to generate €62 billion from the measures it announced earlier this year. We thus remain cautious with our deficit forecast this year and assume a slippage of about 0.7%-pt to 7.0% of GDP. It should be recognized however, that to deliver this outturn will require a large impact from the announced measures in the second half of the year, an impact that is not clearly evident in the data to date. The FT's live blog is also up and running. Related link: Credibility - FT Alphaville Spanish deposits fall as crisis deepens - FT This entry was posted by David Keohane on Thursday, September 27th, 2012 at 12:27 and is filed under Uncategorised. Tagged with Bailout, budget, Mariano Rajoy, Spain.