Coming out of the pandemic has turned out to be a bumpy road to economic recovery. You could even say riddled with mines: the omicron variant and world trade bottlenecks first, the invasion of Ukraine and the inflation afterwards...
All forecasts already indicate that activity in Spain will not complete reconstruction until the first half of 2023. And the Government itself admits that the deficit (the difference between public spending and income, which is covered by debt) will remain 5% this year, after 7% and 11% in 2021 and 2020, respectively. And that will still be 3.9% in 2023.
Last week the Executive cut its growth estimate for 2022 to 4.3% from the previous 7%. The combination of less dynamism of the Gross Domestic Product (GDP) and the need for greater spending to respond to the new crisis implies that over-indebtedness is going to become chronic in the medium term (see graph). If in the 2020 recession due to COVID, public debt reached 120% of GDP, from 95.5% in 2019, in 2023 it will remain close to 116%according to the International Monetary Fund (IMF).
A slab for the state accounts whose annual cost, however, should not be a problem. It could even be seen as an opportunity if the forecast that the Government sent last Friday to the European Commission in the 2022-2025 Stability Program is admitted.
In the document, the Executive calculates that interest payments on the debt will remain close to 2% of GDP over the next few years, despite the over-indebtedness and despite the general rise in interest rates that is already being seen in the markets during the last few weeks. The Euribor, for example, closed April positive for the first time since 2016, raising mortgage interest.
Spain paid 26,805 million euros in interest in 2021, 2.15% of GDP. And in 2020 the bill was 25,237 million, a minimum since 2010 (see graph). In 2013, after the bank bailout the previous summer, spending on debt interest was close to 37,000 million, 3.7% of GDP.
Since then, the monetary policy of the European Central Bank (ECB) of official interest rates at 0% and large injections of money, with massive purchases of bonds as the main tool - intensified with the pandemic -, along with relief funds and recovery grantshave made that serious debt crisis in the eurozone – Portugal, Ireland, Greece and Spain were grouped under the acronym Pigs (pigs, in English) – just a bad memory.
The ECB has already begun to withdraw these monetary stimuli so as not to further fuel inflation due to the rise in energy prices, which has already spread to the entire basket of goods and services. And some voices from the institution chaired by Christine Lagarde have pointed as early as July for a first rate hikewhich is gradually making public debt and credit in general more expensive.
This rise is reflected in a higher cost in the debt issues of the Public Treasury of Spain, which had been placing bonds at historical lows and in 2021 it went so far as to do so on average negative – creditors paid an average of 0.04% for the country's new paper. But, for various reasons, it will not be a problem despite the fact that the total volume of debt is historical, and much higher than in 2013, according to the Government's estimates.
"You have to take into account two important things. One is that interest payments rise more slowly than rates do, due to the fact that a small part of the total debt is constantly being refinanced. The other is that in the current macro picture we have some nominal GDP growth prospects [incluyendo la inflación] quite large, which also limits that debt/GDP ratio," explains Ángel Talavera, chief economist for Europe at Oxford Economics.
Exactly, the State debt portfolio currently has an average life of eight years, after the Treasury has lengthened maturities in recent years, taking advantage of unbeatable financing conditions. In other words, Spain alone refinances 12.5% of the portfolio each year, and, in addition, it is maturing debt with higher interest rates, issued years ago. It has recently gotten rid of the most expensive bonds of the debt crisis placed at 5% to 10 years in 2012.
"In the short term, a rise in interest rates on debt would have a limited impact on interest expenses due to the long average life of the portfolio," agrees economist Cristina Nogaledo in the BFF Banking Group's economic outlook report . "The strategy of lengthening the average life of debt issuances has generated a certain margin of protection against possible rises in interest rates which, if they occur, would take eight years to completely transfer to the average rate of the portfolio," the expert stresses.
"This basically confirms something I have been saying for a long time: although Spain has a serious problem of over-indebtedness that will continue to weigh permanently for decades, the prospects of a debt crisis proper in the short term remain limited despite the fact that interest rates interest rates rise, unless we see tensions in the magnitudes that we saw in 2012 and 2013", continues Ángel Talavera.
"In fact, to this day, Spain still issues new debt at rates that are lower than its average cost, what happens is that the total volume of debt has risen so much that total payments are already rising (that is, the debt has risen more than the rates have fallen)," he details.
The graph immediately below shows the average cost of all of Spain's outstanding debt, and the next, the cost of new Treasury issues.
"Debt payments right now are rising 6-7% a year, which means that with a nominal GDP growing more or less at the same rate, the debt invoice/GDP ratio remains constant", concludes the economist from OxfordEconomics.