Although the economy is going backwards, there are reasons to cheer some of the recent developments in Spain. New PM Rajoy has given some of the embattled regional governments a liquidity lifeline, albeit with strong conditionality. His administration is also putting a lot of heat on Spanish banks to increase loss provisions on their deteriorating portfolio of real-estate loans during the upcoming reporting season.
Yesterday, major unions and employers agreed a landmark deal, which limits wages growth in the current calendar year to 0.5%. Furthermore, the government hopes to pass a new budget stability law tomorrow which sets spending limits for all administrations (including regional governments) and puts in place measures to enforce compliance. Budget Minister Montoro confirmed today that neither income nor property taxes will be raised further during the current phase of the recession. As a result, should Spain need to implement further austerity in order to achieve the 4.4% deficit target for this year, it will need to do so through additional spending cuts.
It is a very tough road for Spain, but positive progress is being made. Little wonder that Spanish bond yields continue to decline.
Michael Derks, Chief Strategist