The Spanish Public Debt, a New Bubble? (Presentation Slides)
18 Pages Posted: 12 Jul 2016 Last revised: 2 Sep 2016
Date Written: August 12, 2016
Abstract
Spain is different. In 2009 Spain was playing the "Champions League" with the best possible risk rating, AAA - Moody's methodology - rubbing shoulders with Germany, Denmark, France, UK, and the USA.
While other countries within the same privileged group (Germany, Denmark, and the USA) were able to successfully navigate the crisis and maintain their risk ratings at the top, in the Spanish case, the result was an eight notches downgrading of its sovereign risk, a worrying Baa2, much closer to the junk level than to the highest note. This leveraging leaves little room for maneuver to finance future deficits.
With the Debt/GDP ratio at 140.5% (1) - the higher level in history - the situation may well cause that new public spending policies financed with more debt could lead to increased interest payable, whose perverse direct effects would be that of a reduction in social spending, and the added uncertainties about debt repayments and burden relief to the next generations.
Understanding the meaning of sovereign risks ratings and their direct influence on the planning of monetary and fiscal policies, should be a subject of required knowledge by those who assume the highest government responsibilities, be it of that the nation, autonomous regions or municipalities.
Likewise, understanding that political decisions involving spending or public investments must be financed by appealing to either the taxpayer through taxes, and/or the financial markets through the issuance of debt, requires the maximum care and diligence in the responsible maintenance of sovereign ratings within their comfort zone i.e. Investment Grade. Outside this area, the appeal to capital markets is almost an impossible and very costly mission. The markets in this globalized world, follow their own rules; lending is the lender's wilful act to those who demonstrate solvency, nothing more.
Pretending that politics and politicians impose their rules against the lender, is ignoring the invisible hand of the markets, how the markets govern themselves in the allocation of the financial resources they are entrusted to manage.
It is then the sovereign’s duty to adhere to a sound management of the public finances by expending less and more wisely.
(1) source: Banco de España’s statistical bulletin, July 2016, p. 211-212
Keywords: Sovereign Debt, Risk Premium, Sovereign Ratings, Spain Debt
JEL Classification: F34, H63
Suggested Citation: Suggested Citation