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A disturbing rise in sovereign debt

The evolution of the public accounts in Spain in 2012 is a source of doubt rather than comfort

As information on the performance of last year’s public accounts emerges, the Popular Party government’s unsound management of the financial and economic crisis is growing increasingly obvious. Public debt, one of the variables that define a country’s financial stability, grew by no less than 14 percentage points of GDP during 2012 and reached the figure of 882 billion euros, probably raising the level of public indebtedness to 84 percent of GDP. Cutbacks in public spending, all of them unpopular and many that cause harm to the country’s future, have not served to fulfill the promises of debt reduction, and probably neither that of the deficit, designated as dramatic priorities by Prime Minister Mariano Rajoy, Finance Minister Cristóbal Montoro and Economy Minister Luis de Guindos.

Viewed in objective terms, Spain in 2012 moved further away from the objectives of stability, whose fulfillment was supposed to foster “green sprouts” in the middle term.

The initial mistake is that the first problem of Spanish debt is not public but private debt, which is three times higher than that of the Treasury. However, the evolution of public debt in particular highlights the strengths and weaknesses of the government’s economic policy. Such a significant jump in debt indicates that the Spanish economy is going to be far removed from even coming close to its deficit-reduction target for the year of 6.3 percent of GDP, and suggests that some sort of transference may be taking place from private debt to public.

For the moment, the bank recapitalization (40 billion euros) is accepted as being public debt, a circumstance that belies its classification as a “loan in extremely favorable conditions,” in the words of De Guindos. The other factor in the blowout in public debt is the plan for the phased payment to suppliers to the public sector decreed by the government, on the grounds that it shored up the solvency of the numerous companies concerned, and favored growth. These were, indeed, the beneficial effects. But the costs, which also need to be considered, have now emerged in all their harshness.

The consequences of this disproportion between objectives and achievements are very dangerous for the Spanish economy. At any time the markets may take notice of the fact that the Spanish public has been paying a huge price for the cutbacks in investment, education and public healthcare, while the results of this austerity have been very limited. In some cases, they have even been counterproductive. Because so far the government has shown no aptitude at all for applying cutbacks according to selective criteria in order to produce the desired effect of reducing the deficit, while at the same time minimizing the adverse effects on growth — its cutbacks have been indiscriminate and harmful.

With public debt standing at nearly 90 percent of GDP, an economy such as that of Spain is going to encounter great difficulties in coping with the problems of financing it. We can only hope that Montoro and De Guindos will explain just what decisions they plan to take to prevent Spanish public debt from rising to a critical level.