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All too predictable

Absolutely true to recent form, a week ago Tuesday the two immediately upcoming Spanish government bond auctions which were to lead up to the weekend's municipal and regional elections were put into journalistic – and might we add – speculative play by an article in one of the world's news sources of reference.


Under the Greece-evoking headline, ‘Hidden’ debt raises Spain bond fears, Financial Times Madrid correspondent Victor Mallet proceeded to outline the hypothesis of Spanish Cato Institute fellow (and vocal political activist, if it need be said given the company he keeps), Lorenzo Bernaldo de Quirós, that the probable overturning of many regional and local governments in the upcoming vote would result in 26.4 billion euros of concealed debt – specifically attributable to the myriad government-owned corporations conjured into existence for a variety of motives – being brought out into the open.

Ignoring for the moment how Mr. Bernaldo de Quirós might have come up with so specific a figure from the murky publicly available accounts of these companies – and no more than mentioning that the proof bar in the centralist-federalist debate to which his take is yet another predictably sterile contribution remains set at the same microscopically low level that it was when the argument began to transfix certain Spanish sectors when the crowns of Aragón and Castilla were united in 1474 – the argument is clearly substandard.

Even assuming that the debts of a government-owned corporation are directly guaranteed by its owners (is Warren Buffet on the hook for Berkshire Hathaway?), exactly what mechanism exists that allows the municipalities, provinces and regions to avoid scrutiny by dissociating themselves from the providers of drinking water to the population, for example? In principle (and certainly in practice in the case of the 115-million euro 2010 profit of Madrid’s Canal de Isabel II), the operating costs are covered by tariffs, leaving investments in infrastructure. These may be funded through debt issuance, as in the above case, but the more likely source in the grand part of small-town Spain is government subsidies – directly visible in the books of those that provide them.

Or we could take the case of  a publicly-owned company charged with the maintenance of, and fire control in, a large park. The company’s only customer is the corresponding level of government, typically a regional environment ministry. They pay the firm for services rendered and via subsidies. Both paid out from budget – itself transparently funded in part by public debt. Presumably, the amounts will be sufficient to cover the corporation’s ongoing liabilities, including debt servicing.

The fact of the matter is, despite the fact that these places are the dumping grounds for expired politicians and party faithful, most of these entities were started because governments became aware of exactly how incompetent they were as administrators and the bulk of them are providing services that would otherwise be undertaken badly and at greater cost by some ministry or town council. To imply that this supposed 26.4 billion euros is, in its entirety, concealed public debt that markets will not take kindly to is merely more obsessive Bernaldo de Quirós anti-regionalist tub thumping.

Whatever happened to the days when responsible journalism involved the soliciting of at least two differing opinions when dealing with polemical issues?


As was to be expected, as the week wore on, Thursday’s slightly tepid auction of  10- and 30-year bonds was widely touted as a near-failure. Then, the truly massive triumph of the opposition PP in local and regional elections – an event that is undeniably favourable for the Spanish economy under the current circumstances – put the icing on the cake. Secondary market yields (not to mention sovereign and CDS spreads) skyrocketed on the news, tagging 5.6 percent for the 10-year. And, for the umpteenth time in the last six months, ‘real’ money appeared to save the day in the mid-5.5’s. This game has proven to be a gold mine for both short-term speculators and long-term yield seekers. Yesterday’s post-election auction of 3- and 6-month letras, for its part, met with more than vigorous demand. The bid-to-cover for the shorter of the two was an immense 6.6. In the equities markets the bank heavy Ibex 35 has – if marginally – outperformed the presumably more solvent German Dax index since Friday’s close.

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Published: May 25 2011
Category: Iberoblog
Republication: Creative Commons, non-commercial
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