The rise in rates catches the Government with the wrong foot

“Have you seen the writing on the wall?”. Bruce Dickinson.

Monetary policy has gone from being a tool to facilitate structural reforms and reduce debt to becoming a excuse for not making reforms and raising the debt. The Government has doubled Spain’s structural deficit -which is generated whether you grow or not- in the last three years to more than 50,000 million euros per year, and has triggered the debt more than any other European and almost global partner.

Spain has been the second country in the world that has increased its indebtedness the most in this three-year period. It has also done this by increasing fiscal pressure more than anyone else and assuming record extraordinary income by plundering everyone by raising taxes and not deflating them.

After consuming more than 200,000 million euros in accumulated deficit, the cicada policy is coming to an end. And winter comes. Rates rise and repurchases from the European Central Bank (ECB) end.

This is particularly worrying for Spain because the ECB has bought 100% of the net issuance of State debt for years, disguising the perception of risk and the cost of the debt of the European countries, but much more of Spain and Italy, the most benefited by the monetary excess.

Spain has been the second country in the world that has increased its indebtedness the most in this three-year period

So far this year we already have an important warning: without the ECB having done anything yet, the 10-year bond has gone from 0.565% with which it began the year to 2%-2.23%. A fall from 11 to 13% and that without the ECB having started yet to withdraw the stimuli or raise rates.

The Government of Spain is going to have to refinance some 240,000 million in 2023-2024. As we know, the ECB will absorb what is due on its balance sheet today.

The net financing needs of the Government in 2023-2024 without ECB coverage would account for at least 120,000 million euros in our deficit estimates if the stagnation scenario holds.

As a good prudent organism, the Treasury has been lengthening the average life -the expiration period- of the debt that currently stands at just over eight years, and taking advantage of it to place the best it can the enormous supply of new accumulated debt generated by the State.

The Treasury has placed more than 40% of the net emission needs forecast for 2022 already in April, accelerating the pace by 6% compared to last year’s pace, showing that they know that winter is coming and they have to try to take advantage of the low rate period.

The Treasury has issued 94,172 million euros this year until the end of April, which represents 40% of the total gross issuance planned for 2022. The problem is that this enormous requirement, 237,498 million euros, is added to additional net issuances in 2023 and 2024 and that, although the duration of the debt is increased, the risk remains.

Difficult years ahead for the Treasury. The Government’s argument that the average cost of accumulated debt is very low, which is totally correct, reminds us of what we heard in the midst of the debt crisis from 2008 to 2011.

It was constantly repeated that the average cost of debt was only 3.5% and with a long maturity period, but it did not matter. The risk premium and the cost of new debt skyrocketed in the face of evidence of solvency risk.

The European Central Bank will be able to disguise part of the risk by buying back the maturities of the bonds it has in its portfolio, and let us not forget that it will continue to be aggressively – and mistakenly – accommodative, but the problem of the solvency and sustainability of public accounts does not change.

– Growing structural deficit and an expectation of ‘socialist’ fiscal consolidation via income, which is an illusion given the slowdown and runaway spending.

– Financing needs that mean that Spain could account for up to 6-7% of the eurozone’s bond supply in 2024.

– very high public debt that will have to be refinanced, albeit in the coming years, at much higher rates. A debt of 118.4% of GDP at the end of 2021, equivalent to almost 1.5 trillion euros at the end of 2022 and twice the limit of the Stability Pact.

When revenues go up the government spends much more and when tax revenues go down, too.

What this period has shown, once again, is that when revenues rise the Government spends much more and when tax revenues fall, too. Combining structural deficit, high debt and irresponsible governments that hide behind fallacious arguments of “low income” lead us back to an uncertain terrain. It may not be like the 2008-2011 crisis – no crisis is like the previous one – but I am sure that the negative impact on potential growth, employment and investment will be significant.

When governments have such a strong incentive to kick forward and pass the problem on to the next, and the political consensus is unwilling to reduce the huge brake on runaway political spending, the result is always bad.

winter comes with empty pantry and the cicada-government once again trusts that the cost of the debt is low because they say so. Then, when it doesn’t happen, they blame “the markets”, Germany or any foreign enemy and continue fattening the bureaucratic machinery.

Times of low interest rates and high liquidity should not be used to trigger structural imbalances. Again, the Government has done exactly that. And they say that “this time” the response to the crisis has been different. Get into debt and spend without control. Well, exactly the same, but to the beast.

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