Good results drag Spain away from bailout territory

Pedro Passos Coelho 2011_1.jpg

Madrid announced on Tuesday (29 January) that it had beaten revenue targets for 2012 as tax hikes offset a shrinking economy, moving the country further away from an EU-IMF sovereign bailout which seemed unavoidable a few months ago.




The Spanish central government's revenue, after transfers to regional governments, was €123 billion last year, more than the €119 billion targeted in the 2012 budget, Treasury Minister Cristobal Montoro said at a news conference.

Despite a recession, flagging consumer spending and 26% unemployment, tax revenue rose by €11 billion in 2012 compared with 2011, due to higher value-added tax (VAT), income tax and corporate tax.

Corporate tax revenue rose more than 29% in 2012 from 2011, the minister said.

Madrid simultaneously repeated its commitment to cut spending even as Europe said it may give the country more time to trim its deficit due to the recession.

Bailout likelihood receding

The likelihood of a sovereign bail-out for Spain is receding since the European Central Bank said it would act as a backstop to bets against the euro, lessening borrowing costs for Europe's fourth-largest economy (see background).

A full sovereign bailout for Spain appeared unavoidable in October but the demand by Madrid was held off at the request of Germany. Instead, Spain was granted a €40 billion assistance to help shore up its strained banking sector.

>> Read: Spain to receive EU bank aid mid December

"I agree that the probability of a full financial bailout has decreased, as PM Mariano Rajoy already said that he would apply only if market enforces and markets are currently calm," said Zsolt Darvas, an analyst at Bruegel, a Brussels-based economic think tank.

But the analyst added that Spain's fundamental problems remain, citing high unemployment, a bleak economic outlook, high public and private debts, largely dysfunctional banks, weak competitiveness and an unfavourable external environment.

"Overcoming these hurdles will prove to be very difficult, and an eventual lack of sufficient progress amid of fiscal consolidation bias in the whole euro area and an appreciation euro, resulting from the ECB's reluctance to deploy more non-conventional tools, may change market sentiment later," Darvas told EURACTIV in e-mailed comments.

EU praise

On Monday (28 January), the European Union's Economic and Monetary Affairs Commissioner Olli Rehn said fiscal targets could be pushed further out if the economy was found to have worsened, while praising Spain's efforts to cut its deficit.

Spain has already been given an extra year, until 2014, to meet Europe-agreed goals of a deficit of under 3% of gross domestic product.

The government has cut billions of euros of spending across the board, even in politically sensitive areas like education and health.

Eurozone finance ministers approved on 3 December the disbursement of nearly €40 billion to help shore up Spain's strained banking system.

>> Read: Spain to receive EU bank aid mid December

The eurozone heads of state and governments had earlier agreed, on 29 June, that EU rescue funds could be used in a "flexible and efficient manner" to lower government borrowing costs.

Under the deal, Italy, Spain and other troubled countries will also be able to tap the bloc's temporary EFSF and permanent ESM rescue funds to support their government bonds on financial markets.

The EU summit statement did not give further detail, saying only that the flexibility will be offered to member states that are in line with EU budget deficit rules.

Subscribe to our newsletters