- Spanish economic forecasts ambitious
- Bail-out looming
- Italian economic forecasts unrealistic
- Bail-out also on the cards


By Greg Peel

Tonight and next week, in a two-step process, the Greek parliament will vote to ratify the Samaras government's new, tighter fiscal measures and the proposed 2013 budget. Tighter measures are required to satisfy the troika and thus release the next tranche of bail-outs funds for Greece, and Samaras has warned that a failure to pass the budget in parliament will result in Greece being ejected from the euro. On the other hand, Samaras has also suggested that a "yes" vote will end, for ever more and "irreversibly", global talk of Greece being ejected from the euro.

I don't think so, Antonis. It's all politics of course, but the Greek ejection argument is only as good the due date for each subsequent bail-out tranche and the results of the government's tightening efforts to that point. As has now become abundantly clear to all and sundry, there is a certain contradiction in assuming sovereign debt levels can be cut in Europe simply by cutting spending. On the other side of the ledger, spending cuts lead to economic recession and lower revenues, offsetting the savings made. This is not a point lost on the new French president, but it does seem to be lost on the leaders of Club Med, notwithstanding political spin, of course.

The Spanish government expects the economic recession in Spain to come to an end by 2013. Slash spending, push unemployment beyond 25%, and sure ? should be able to turn it all around in less than six months. As the economists at Danske Bank put it, "In an environment of fiscal tightening and sliding house prices, that appears to be wishful thinking".

The Rajoy government is forecasting average GDP growth of negative 0.5% in 2013. This implies a turnaround from current deeper contraction by mid next year to achieve this net result. The basis is a forecast for 6-7% annual export growth in 2013-15, but to do this Spain will either need to see a notable pick-up in global growth, Danske suggests, or global market share increases for Spanish exports in offerings such as services and green energy. Or both. The Danske economists won't say either is impossible, but they do feel "this is an ambitious target that may prove difficult to reach".

Spain has implemented many reforms over the past year, but looking at the business climate and unit labour costs, Danske believes the government is only half way through a required reform agenda. Meanwhile, market share is hard to win in a competitive region sharing the one currency. And even if exports grow as forecast, Danske believes the contraction in Spanish domestic demand will be much greater than the government is anticipating.

Danske expects Spain will miss its fiscal target in 2013, that unemployment will rise further to 26.5%, and that GDP will contract by 1.5% or more.

Aside from the impact of fiscal tightening on the economy, Danske notes Spain experienced a housing bubble up to the GFC which matches that of Ireland, yet house prices have not fallen nearly as much as has been the case in Ireland in the interim. The economists believe another 20% could be wiped off Spanish prices in the next three to four years. Falling house prices reduce wealth, provoke uncertainty and lack of confidence and can encourage substantial precautionary savings, which harks back to potentially weaker domestic consumption than the government is hoping for.

It is bad enough to simply be worried that the Spanish economy will perform worst than expected, Danske suggests, and complacency on the Spanish government's part just makes things worse.

Danske is assuming Spain will be asking for a bail-out from the ESM eventually, triggering ECB bond buying. However the Spanish government would do well to rethink its forecasts, the economists warn, for a "miss" on budget reduction will likely bring about demand for further reforms from the troika in exchange for assistance.

Over in Italy, the picture is much the same. "We see a larger fall in GDP and a higher fiscal deficit in 2013," declare the economists at Citi, "relative to the government's recent forecasts".

Citi can't see the Italian debt ratio entering a declining trajectory any time soon, arguing that Italian economic fundamentals have shown little sign of improvement despite some general improvement in market conditions. The private sector cannot lower its savings rate to absorb fiscal tightening.

Having said that, it appears Italy's technocratic government is now taking a softer stance on fiscal austerity which is understandable, Citi notes, given a general election due in the coming northern spring. This offers up the distinct possibility of a new government being elected which is more pro-growth than pro-austerity.

Either way, Citi's "baseline" assumption is that Italy will be forced to ask for a bail-out in 2013.