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Home > Investments > European

By Bradley Gerrard | Published Jul 13, 2012

Warning over Spanish austerity drive

Spain’s ramped-up austerity drive may be counterproductive for the economy amid the nation’s ongoing banking crisis, investors have warned.

Spanish prime minister Mariano Rajoy announced €65bn (£51bn) of spending cuts and tax rises to parliament early this week, in spite of Spain getting a year’s extension from the EU to meet its deficit targets. These included an increase in VAT from 18 per cent to 21 per cent, a cut in unemployment benefits and reduced funding for political parties and local authorities.

Didier Saint-Georges, a member of the investment committee at Carmignac Gestion, said Spain was “trying its best”, but he stressed that the economy faced a severe outlook for global economic growth that could derail its deficit-control efforts.

“The key issue is that the recent initiative [by Spain] may not make a huge improvement on the country’s bond yields as the global environment is worsening,” he said.

John Pattullo, manager of Henderson Global Investors’ £1bn Strategic Bond fund, said that structural reform was needed, rather than purely austerity, citing France as an example of a country that is favouring growth as a way of reducing its debt. “It is not yet clear if what Spain is doing will be beneficial for bond yields,” he said. “Countries need growth and that is where fiscal austerity could be counterproductive.”

The austerity announcements came as the EU confirmed it was handing Spain an initial tranche of €30bn in bailout money, to be pumped into the nation’s debt-laden banking sector as part of a €100bn package.

Eurogroup president Jean-Claude Juncker said there would be specific conditions for specific banks in relation to the funding, adding a final loan agreement would be signed on or around July 20.

Ministers also agreed that once a single European banking supervisor is set up next year, Spanish banks can be directly recapitalised from the eurozone’s rescue fund without any state guarantee being agreed.

But, before Spain gets the full bailout package, it is being pressed to inflict losses on investors – a course of action referred to as ‘burden sharing’ – by writing off preferred shares and subordinated bonds, according to reports in the Financial Times.

Mr Pattullo said he foresaw burden sharing in Spain and expected the weight to fall on junior bondholders, as Spanish taxpayers “cannot afford it”.

“There are €67bn of subordinated bank bonds and if they start haircutting and ‘equitising’ these bonds that is burden sharing,” he said.

“There is a burden to be shared between the taxpayer and the bondholder and as the crisis has gone on it has fallen more heavily on the bondholder and less on the taxpayer, and rightly so.”

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