Source: Spanish Government Data
As with all Euro nations, the Kingdom of Spain is obliged to count its national debt according to the rules laid down in the Maastricht Treaty. This counts all public debt as the national debt. However, there is a lot of room for manoeuvre in those rules.
There are many debts that the Spanish government doesn’t include in the national figure, even though they originate from the public sector and so should be within the remit of public debt. These include the obligations for future payments under the national pension scheme, public employees’ pensions, bank depositor guarantees, the debts of state-owned enterprises, and outstanding payments represented by unpaid invoices.
The IMF lists Spain’s gross debt to GDP ratio as 98% at the end of 2017 and its net debt to GDP ratio as 86%. The difference between the two figures is that gross debt counts all of the money owed by the public sector, but the net figure deducts the nation’s assets. Although the nation’s pension obligations don’t count as part of gross debt, the state pension fund’s assets are included in the net debt figure.
There are many different ways to measure national debt. While the IMF judged Spain’s national debt to GDP ratio as 98% for 2017, the OECD calculated the figure as 114.7% for that year.
When investigating Spain’s national debt sustainability, it is important to look into the country’s ability to repay its debts. This applies to the private sector as well as the public sector. This is why economists are more interested in debt figures in relation to GDP that absolute values.
As the OECD graph above shows, the Spanish government did a very good job of reducing its national debt until 2007. As a member of the Euro, Spain was obliged to reduce its national debt to 60% of GDP and also control government budget deficits so that they didn’t rise above 3% of GDP.
As you already know, the amount of debt doesn’t matter. The important metric is the debt to GDP ratio. So, when the Spanish government wanted to spend more, it just needed to increase the country’s GDP.
Spain is one of the southern European countries that experienced rapid economic expansion in the 1990s thanks to government debt servicing costs being reduced by Euro membership. When the government reduces the interest that it will pay on its bonds, the country’s banking sector reduces its lending interest rate accordingly. Thus, Spain experienced a boom stoked by cheap credit.
Although Spain is not officially classified as an emerging economy, its performance in the 1990s and through to the 2000s followed the classic emerging economy debt trap.
Delighted by the opportunities that lower interest rates brought in order to expand the economy, the government stoked the fire further by offering tax breaks to the construction sector.
All sales within a country add to the national GDP. If a government wants to ramp up its GDP figures it would not get very far by promoting the manufacture of shoes, or the sale of burgers. The ultimate mass market big ticket item is property and countries that want to scale up the league of wealthy nations always pump up the construction sector.
Property development is very labor intensive and can reduce the unemployment rate a lot faster than genetic engineering, or the software sector. So, the Spanish picked the construction sector as its route to the top. The graph of Spain’s GDP shows that the strategy worked.
Unfortunately, the little dip shown in this graph corresponds to the 2008 banking crisis, which tightened credit all over the world. An overdeveloped property market is highly geared. Banks, eager to gain business, will lend up to 95% of a property’s value. This low security requirement only applies to the property market.
Given the mindset of an infinite capacity for sales that gripped Spain for almost two decades, the country’s property developers faced no problems getting development financing from Spain’s banks. When the credit squeeze happened, the Spanish property market was left with an overhang of 3 million unsold homes. The country’s natural population growth only creates a demand for 44,000 new homes each year. The result of the 2008 subprime crisis was:
Without a currency of its own, Spain couldn’t follow through with the standard strategy of inflating its way out of debt.
The bust cycle of the Spanish property market took a long time to play out. Regulators turned a blind eye to Spain’s banks retaining bad loans on their books to keep them legally financially viable. However, business logic dictated that the banks certainly couldn’t lend any more.
The slowdown in the property market vastly reduced local government income from property taxes, which are applied both as a property sales tax and as an annual levy on value. When sales stopped and valuations fell, local government was left without a major source of income and turned to financing, taking on loans and increasing the national debt.
The Spanish government was intentionally slow to act because it didn’t have sufficient income to bail out all of the banks and reflate the economy. Without its own currency, the possibility of printing its way out of the problem was closed to the Spanish government and the ECB refused to follow the UK’s Bank of England and the US Federal Reserve down the quantitative easing path. In the end, can kicking paid off. A quick check on the annual budget deficits of the Spanish government over the past decade shows when the national debt ramped up.
Finally, the ECB took up debt swaps and quantitative easing strategies, removing much of the cost of rescuing the banks from the Spanish government. However, that strategy has resulted in a lot of hidden debt that Spain doesn’t record on its national debt, but will need to be paid off by someone someday. The government still hasn’t got its budget deficit below the Maastricht-required 3%, so the problem isn’t over yet.
The central government removed the right of regional and local governments to raise debt independently, thus reining in spending and preventing the national debt from spiralling out of control.
Although Spain’s central government managed to get a grip on debt by centralizing its sourcing, the enmity this strategy provoked stoked the regional independence movements, which still haven’t reached a natural conclusion in Catalunya.
The Madrid government’s Ministerio de Economía y Empresa (Ministry of Economy and Industry) is ultimately responsible for Spain’s national debt. The actual sale of government debt instruments has been delegated to a department of the Ministry, which is called Tesoro Publico.
All Spanish government are sold through auctions. This is called the “primary market.” Only Primary Dealers are allowed to submit tenders to purchase an allocation of government securities directly from the Tesoro Publico. Any other investor needs to negotiate with a Primary Dealer to act as an agent for purchase directly from a primary issuance. Alternatively, anyone can buy Spanish government debt instruments on the secondary markets.
The range of products that the Tesoro Publico offers is very simple. Three are only three types of devices on offer:
This structure splits the opportunities for investors into three categories: short-term, medium-term, and long-term.
The Letras de Tesoro are Treasury bills. They have maturity periods of up to a year, they do not pay interest, but they are sold at a discount and redeemed at full face value. The Tesoro Publico currently offers Letras de Tesoros with maturities of 3 months, 6 months, and 1 year.
Bonos de Estado offer a great medium-term opportunity to investors because they only have maturity periods of 3 and 5 years. These are inflation-linked bonds that are sold in units of 1,000 Euros, so they also appeal to the retail market. The bonos are known as “state bonds” in English and they pay a fixed interest rate for their duration. The capital amount increases each year by the rate of inflation that is measured throughout the Eurozone and expressed in the Harmonized Index of Prices to the Consumption.
Obligaciones del Estado are the classic government bonds that commercial investors look for. These have maturity dates of 5 years or more and pay a fixed rate for their lifetime. The Tesoro Publico pays back the full amount of the loan represented by the bond on its maturity date.
What facts should you know about Spain’s national debt?