Spain faces hard 2011 with big deficit, slow growth

A protester holds a flare in Barcelona, on October 15 during a worldwide demonstration Spain is on track to miss key targets for economic growth and deficit-cutting in 2011, analysts say, a grim scenario that is pounding its credit rating. Standard & Poor's downgraded Spain's credit rating Friday by a notch to AA-minus, a week after its rival Fitch Ratings sliced the rating by two notches to the same AA-minus level.
Both agencies judged the outlook to be "negative," meaning there is a risk of more cuts ahead.
A third rating agency, Moody's Investors Service, will likely downgrade Spain's credit standing by the end of October, as it has been threatening to do since the end of July.
All three give similar reasons: feeble growth, bad finances in the regional governments, a banking sector yet to recover from the 2008 property bubble collapse, as well as massive private debt held by households and businesses.
No-one now believes Spain can achieve the official 2011 economic growth target of 1.3 percent.
Even Finance Minister Elena Salgado has recognised as much, saying that if she "was to redo the forecasts today, they would of course be different to those we did before summer." But a month before November 20 general elections, there is no question of cutting the forecast.
Salgado avoided criticising Standard & Poor's in a news conference Friday, but she said the downgrade was above all the result of "global financial tension".
"Everything points to (growth) being 0.7-0.8 percent, about 60 percent of the target," said IG Markets analyst Daniel Pingarron. The International Monetary Fund, Bank of Spain and Standard and Poor's all predict growth of 0.8 percent.
A major cause of the weak growth is unemployment, at 20.89 percent the highest in the industrialised world in the second quarter, which has depressed consumption, said David Fernandez, analyst at brokerage Tressis.
At the same time Spain no longer enjoys the bumper income it once had from the property bubble.
Growth and the deficit "are two sides of the same coin," said Fernando Hernandez, funds manager at Inversis bank. "So it is very likely that the deficit target will not be met."
The key plank of the Spanish government's economic policy, cutting the deficit is also a major concern of the markets.
After letting its public accounts slide into a deficit equal to 11.1 percent of annual gross domestic product in 2009, Spain met its 2010 target and cut the deficit to 9.3 percent of GDP.
It is now targeting deficits of 6.0 percent of GDP in 2011 and 4.4 percent of GDP in 2012.
But Standard & Poor's predicts it will miss those goals, too. It forecasts a public deficit equal to 6.2 percent of GDP for this year and, more worrying, 5.0 percent in 2012.
"The autonomous regions are to blame," said IG Markets' Pingarron, who said the central government would meet its own target.
The 17 powerful regions, which enjoy great financial autonomy, are a recurrent source of concern for the markets because of their high debts, which amounted to 133.172 billion euros ($184 billion), or a record 12.4 percent of GDP, at the end of June.
On the same date, 12 of the regional governments were not meeting the deficit targets set by the central government.
The future does not look bright.
Some analysts are already evoking a possible return to recession: both Goldman Sachs and the French statistics institute INSEE are predicting an economic contraction of 0.2 percent in the final quarter of 2011 and again in the first quarter of 2012.
The French bank Natixis has warned the economy will shrink by 0.2 percent in the fourth quarter and then shrink by 0.1 percent in the first quarter of next year.
"If there is no domestic demand and external demand (such as from exports and tourism) slows because other countries also experience weak growth, then Spain will have a difficult outlook for the next two years," said Inversis bank's Hernandez.