Capital outflows soar as Spain’s crisis deepens
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 €41.3bn 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 €100bn for the country’s lenders.
In all, €163bn — or about 16% of economic output — left Spain between January and May, with domestic banks sending money abroad, foreign lenders pulling out cash and mostly nonresident investors dumping domestic assets.
Over the past 11 months, funds equivalent to 26% of gross domestic product (GDP) exited the country, yesterday’s data from the Bank of Spain showed.
Spain’s struggling economy, which is expected to remain in recession well into next year, is now at the centre of the eurozone debt crisis, and rising refinancing costs risk shutting the country out of international debt markets.
Domestic demand has stalled since the crisis began four years ago, hitting a service sector that accounts for about 70% of the economy, while high unemployment has eroded confidence. Retail sales fell by 5.2% year on year in June, separate data showed yesterday, marking a 24th successive 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,” an economist at Madrid broker M&G Valores, Nicolas Lopez, said.
“For the moment there’s no sign that this is going to change in the medium term.”
With tax revenue 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 this year. That target could be eased as Spain decides later in the year how to use an extra 1% cushion granted by the European Union last month when the indebted country’s deficit target was increased to 6.3% for this year from 5.3%.
The government announced a new €65bn austerity package last month, two months after propping up Bankia, a major lender.
In June, the government requested help from Europe to recapitalise its banks, which were battered by the bursting of a decadelong real estate bubble in 2008.
But the initiatives failed to calm investors for more than a few days, and yesterday’s gloomy numbers will do nothing to ease pressure on the bond yields that Spain needs to rein in to avert a fully-fledged bail-out. The premium that investors pay to buy Spanish over German debt was about 532 basis points yesterday, far below last week’s euro-era highs, on hopes the European Central Bank will announce stimulus measures, helping to bring Spanish and Italian borrowing costs down.
Yesterday’s data showed Spanish and nondomestic banks moved €31.9bn out of the country in May. The headline figure compared with total outflows of €26.6bn in April and a peak of €66bn in March. Plummeting domestic demand was reflected in May’s current account numbers — also published yesterday by the central bank — showing a deficit of €754m, narrowing sharply from €3.4bn in the same month of last year.
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 €1.5bn, down from €3bn 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% next year, has passed some of the deepest budget cuts in decades to deflate one of the eurozone’s largest budget deficits. The gap stood at 8.9% last year.
The tax hikes passed under the austerity measures, including a three percentage point rise in value added tax, are expected to dent high street spending further.
“(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, an economist at Citi in London, said. Reuters