This Week's Focus: The Spanish public debt exceeds 100% of GDP

This Week's Focus: The Spanish public debt exceeds 100% of GDP


The amount outstanding of debt of Spanish public administrations continues to increase, both at face value as a percentage of the Gross Domestic Product (GDP). In March 2016 the gross public debt was 1.095 billion euros (Trillion EUR), which means a rate of 101.3% of GDP in December 2015 and 100.51% of the estimated GDP March 2016.

Why increase the debt?

The reasons for the increase in debt are to be found on several factors: first, the need to finance the public deficit, ie the difference between tax revenues and expenditure of public administrations, including pensions and unemployment benefits, among others. Since Spain has accumulated since 2007 successive deficits, inadequate income tax collection has become necessary to resort to issuing debt to balance the books.

Second, the need to refinance maturities as emissions have been overcoming also has reduced the volume of outstanding debt. The Treasury has attempted to extend the maturities of emissions to the extent that the market has allowed it: so, in 2011 during the crisis of the euro, had to go mainly to short-term issues; however, thanks to the expansive action of the ECB, first providing liquidity to banks and then buying government bonds on the secondary market, issued debt to 50 years in late 2014 for the first time in its history.

The essential support of the ECB

Finally, to the contrary, the aggressive action by the European Central Bank's monetary policy, indirectly funding to States through direct intervention in the debt market and setting negative nominal rates for the first time have reduced the financial burden of debt, although its volume has increased. Thus, in 2016 interest payments lower than in 2015, which is a turning point in public financial expenses is expected. Nevertheless, about 20% of public spending will be for the payment of interest on the debt.

Prospects for stabilization in the best case

In the immediate future it is likely to worsen the situation, far from improving. If the ECB's monetary policy continues for a while, will continue to reduce the interest burden on the public budget, as new emissions to near zero or negative rates, represent a much lower cost than those that fall due .

On the other hand, the improvement in the economy should lead to a lower deficit, by the non-financial budget (taxes less benefits and public consumption). Thus, a stabilization of financial expenses for interest on the debt as lower primary deficit should involve a stagnation in the outstanding balance of public debt.

However, the high debt and the difficulty of reducing the public deficit since the bursting of the housing bubble, place Spain in a weak position against any unexpected turn in the economic cycle. It is therefore appropriate to actions in line if possible reduce the deficit and set an ambitious timetable for debt reduction. ECB policy will not last forever and, without it, go to the capital markets will not be as beneficial.