The Foundation of the savings banks has launched the alert voice on the situation of the national public accounts a few months after Que lam Les (The Obligation that Members Stick to Deficit and Debt Targets). Funcas warns that Spain should start reducing the public debt to GDP ratio “quickly”, to anticipate “potentially adversary” situations in the financial markets, recover the margin for fiscal policy and stop the increase in the cost of its liability due to the rise in interest rates applied by the European Central Bank (ECB).
In an article in ‘Cuadernos de Información Económica’, Santiago Lago stresses that several eurozone countries agree to a reduction of one point per year in the debt-to-GDP ratio for the most indebted countries, as is the case of Spain. The author has commented that in the next decade fiscal sustainability is at stake, the European Commission considers our risks high in the medium term. All of this makes it necessary to “urgently” design and implement a gradual, but continuous and sustainable consolidation plan.
Funcas has insisted that public debt is one of the main vulnerability factors of the Spanish economy. In the current context of the application of new European fiscal rules and the withdrawal of support from the ECB, Raymond Torres and María Jesús Fernández also raise the need to initiate a progressive reduction in the debt to GDP ratio.
The persistence of a high public deficit is a vulnerability factor for Spain, especially when it is expected to increase public debt issues this year, they warn. Added to this is the rise in yields, which will mean an increase in interest payments in relation to GDP.
GDP will weaken in the second half
In addition, for the authors, in the short term there will be a sharpening of the signs of weakening as a consequence of the monetary tightening cycle, so that growth will register a slowdown during the second part of the year. This slowdown, together with the measures to fight inflation, the indication of pensions and the increase in financial charges, will make it difficult to correct budgetary imbalances.
In the absence of adjustments, Funcas has stated that the deficit will stand at 3.7% in 2024, above the 3% estimated by the Government, and public debt will exceed 108% of GDP, 10 points more than before the pandemic . The imbalance between public revenue and spending ended last year at 4.8% of GDP, while Spanish liabilities stood at 113.2% of GDP.
All this despite the resilience shown by the Spanish economy in the first half of the year and which the authors attribute to the competitiveness of the export sector, the absence of a real estate bubble and the low level of household debt. For his part, José Ramón Diez Guijarro warns that the double mandate of the central banks will be put to the test once the intense tightening of financial conditions begins to cause sources of tension.
The crisis episodes experienced in some medium-sized North American banks and in Credit Suisse revealed both the weaknesses of the business models of some financial institutions with solvency and/or liquidity problems, as well as the failures in their regulation and supervision. Although the crisis “seems fairly stabilized, it is a warning to central banks.” From Funcas, they have indicated that the positive news is that one quarter after the start of tensions in the US, the focus of financial stress “seems quite controlled.”