Capital flees Spain as budget gap jumps

 

Capital flight from Spain gathered pace in May and the central government deficit rose further above target in June, taking the country two steps closer to the full-scale bailout it is desperate to avoid.

Outflows rose to €41.3 billion as the government's rescue of one its biggest banks hit already fragile investor confidence and triggered a plea for European aid worth up to €100 billion for the country's lenders.

In all, €163 billion - or around 16% of economic output - left Spain between January and May, with domestic banks sending money abroad, foreign lenders pulling out cash and mostly non-resident investors dumping domestic assets.

Over the last 11 months, funds equivalent to 26% of GDP exited the country, Tuesday's data from the Bank of Spain showed.

Spain's struggling economy, which is expected to remain in recession well into next year, is at the centre of the euro zone debt crisis, and rising refinancing costs risk shutting the country out of international debt markets.

Domestic demand has stalled since the crisis started four years ago, hitting a service sector that accounts for around 70% of the economy, while sky-high unemployment rates have further eroded consumer confidence.

Retail sales fell by 5.2% year-on-year on a calendar-adjusted basis in June, separate data showed on Tuesday, marking a 24th straight month of declines.

"These figures are proof that the Spanish economy continues in recession and a drop in retail sales could indicate a GDP contraction of around 2% this year," economist at Madrid broker M&G Valores Nicolas Lopez said.

"For the moment there's no sign this is going to change in the medium term."

SQUARING THE CIRCLE

With tax revenues falling sharply as the recession deepens, Spain reported a deficit of 4% of GDP on its central government accounts in the first half of the year, above a goal of 3.5% set for the whole of 2012.

That target could be eased as Spain decides later in the year how to use an extra 1% cushion granted by the EU in July when the country's deficit target was widened to 6.3% for 2012 from 5.3% initially.

The government announced a new €65-billion austerity package in July, 2 months after stepping in to prop up major lender Bankia.

In June, it requested help from Europe to recapitalise its banks, battered by the collapse of a decade-long real estate bubble in 2008.

But the initiatives failed to calm investors for more than a few days, and Tuesday's gloomy numbers will do nothing to ease pressure on the bond yields that Spain needs keep from rising to avert a full-fledged bailout.

The premium investors pay to buy Spanish over German debt was around 532 basis points on Tuesday, far below last week's euro-era highs on hopes the ECB will announce stimulus measures, helping to bring Spanish and Italian borrowing costs down.

Tuesday's data showed Spanish and non-domestic banks moved €31.9 billion out of the country in May. The headline figure compared with total outflows of €26.6 billion in April and a peak of €66 billion in March.

Plummeting domestic demand was reflected in May current account numbers also published on Tuesday by the central bank and showing a deficit of €754 million, narrowing sharply from €3.4 billion in the same month of 2011.

The gap shrank on a lower trade deficit and a lower primary income deficit - the difference between money paid abroad and money received.

The trade gap stood at €1.5 billion, down from €3 billion a year earlier, as exports rose 5.5% while imports dropped 2.1%.

The government, which expects the economy to shrink 1.5% this year and 0.5% in 2013, has passed some of the deepest budget cuts in decades to deflate one of the euro zone's largest budget deficits. The gap stood at 8.9% in 2011.

The tax hikes also passed under the austerity programme, including a 3 point rise in IVA, are expected to further dent high street spending.

"(Spain) needs more time to rebalance the economy and hit the deficit targets. The current framework is making Spain dig itself into a slightly bigger hole," Guillaume Menuet, economist at Citi in London, said.