Thursday, 30 August 2012

Draghi Takes On Bundesbank Orthodoxy In Crisis-Plan Plea

By James G. Neuger - Aug 30, 2012 2:01 AM GMT+0400

Countering arguments made by the German economics establishment since before the introduction of the euro, European Central Bank President Mario Draghi said it’s in Germany’s interest to consent to extraordinary steps to preserve the currency shared by 17 nations.
Draghi used the pages of German weekly Die Zeit to plead for a more expansive role for the central bank and to say that the crisis-struck currency can be stabilized without sacrificing each country’s independence to a unified European political system.
Mario Draghi, president of the European Central Bank (ECB). Photographer: Hannelore Foerster/Bloomberg
In tactical terms, Draghi sought to neutralize protests made by Germany’s top central banker, Jens Weidmann, against ECB proposals to buy Spanish or Italian bonds on the market in order to bring down their borrowing costs and prevent the debt crisis from spreading. Draghi made his appeal in the run-up to the ECB’s Sept. 6 discussion of bond-market interventions forSpain or Italy and a Sept. 12 ruling by Germany’s supreme court on the viability of the planned euro rescue fund.
“A new architecture for the euro area is desirable to create sustained prosperity for all euro-area countries, and especially for Germany,” Draghi wrote. “Yet this new architecture does not require a political union first. Economic integration and political integration can develop in parallel.”
Draghi didn’t mention Weidmann, who last week broke more than a month of silence by telling Spiegel magazine that the bond-buying proposal is a “touchy” matter and the thought of interest-rate targets gives him “stomach pains.” Weidmann, head of the Bundesbank, summed up the idea as “addictive like a drug.”

Jackson Hole

Two days after the Bundesbanker’s comments were released, Draghi canceled a trip to the annual Jackson Hole economic symposium in the U.S. this week to shepherd the ECB’s negotiations over the bond purchases.
Since Draghi first floated the idea on July 26, Spanish and Italian bonds have rallied. Spain’s extra 10-year borrowing cost over German levels declined to as low as 465 basis points Aug. 21 from 611 basis points. Italy’s extra borrowing cost has dropped to 410 basis points the same day from 518 basis points.
Draghi, an Italian applauded by Germany’s best-selling Bild tabloid for his disciplined economic philosophy when he took over the ECB last year, said Germany as Europe’s linchpin economy would be a leading beneficiary of any unconventional measures to stabilize the currency union.

ECB Tasks

He struck out against a German shibboleth -- echoed by Weidmann in the Spiegel interview -- that the central bank only exists to fight inflation.
In fact, euro treaties label price stability the ECB’s “primary” task, and otherwise require it to support the European Union’s general economic policies. The Bundesbank and its allies also point to provisions prohibiting the ECB from directly financing governments.
“Our mandate sometimes requires us to go beyond standard monetary-policy tools,” Draghi wrote. “This is our responsibility as the central bank of the euro area as a whole.”
The Weidmann-Draghi debate in the German media served as a prelude to the crisis-management showdowns that loom as Europe’s leaders return from vacation. In addition to the ECB’s bond- buying clash and the German court ruling, the agenda includes a review ofGreece’s deficit-reduction progress, details of Spain’s bank-aid program, emergency loans for Cyprus and the unveiling of European bank-supervision plans.
Draghi took the unusual step of publicly cornering Weidmann on Aug. 2, telling a press conference that the Bundesbank chief was alone in expressing “reservations” about a renewed bond- purchase program that would tie countries such as Spain or Italy to tough conditions.

‘Political Union’

While the battle is over the ECB’s next move in the more than 2 1/2-year-old debt crisis, it also played out on a higher level, with Draghi challenging a strand of German thinking that holds that only a fully fledged “political union” will right the euro’s wrongs.
That all-or-nothing approach has long appealed to the Bundesbank. In October 1990, more than a year before the summit in Maastricht, Netherlands, that set the stage for the euro, the German central bank said only a “comprehensive political union” could make a common currency work.
After being named Bundesbank president last year, Weidmann said the euro’s salvation probably required a “giant leap” to a federal political system instead of a “middle road” of tinkering with a flawed setup.

United States

Draghi parried those arguments by saying that Europeans aren’t faced with the choice of the extremes of reverting to national currencies or building a United States of Europe. Europe already has many of the trappings of political union, with a directly elected European Parliament and a range of decisions made by representatives of national governments, he wrote.
“Those who want to go back to the past misunderstand the significance of the euro,” Draghi wrote. “Those who claim only a full federation can be sustainable set the bar too high.”
Euro countries can undertake a “gradual and structured effort” to strengthen central oversight of national budgets and the banking system, and build a more robust common market, Draghi said.
To contact the reporter on this story: James G. Neuger in Brussels at
To contact the editor responsible for this story: James Hertling at

Gross Says QE3 Likely Even If Bernanke Doesn’t Provide Hint

By Cordell Eddings and Trish Regan - Aug 30, 2012 10:31 AM GMT+0400

Pacific Investment Management Co.’s Bill Gross said the Federal Reserve will add to monetary stimulus even if Chairman Ben S. Bernanke fails to indicate additional measures during a speech in two days.
Pacific Investment Management Co.’s Bill Gross said the Federal Reserve will add to monetary stimulus even if Chairman Ben S. Bernanke fails to indicate additional measures during a speech in two days. Photographer: Andrew Harrer/Bloomberg

Policy makers will announce more so-called quantitative easing “relatively soon,” Gross, who runs the world’s biggest bond fund, said in an interview on Bloomberg Television’s “Street Smart” with Trish Regan.
The Fed signaled last week it’s ready to take further steps to spur the economic recovery. Many policy makers said additional stimulus probably will be needed soon unless the economy shows signs of a durable pickup, according to minutes released Aug. 22 of the central bank’s most recent meeting, on July 31-Aug. 1. Bernanke is scheduled to speak on Aug. 31 at the Kansas City Fed’s economic-policy conference in Jackson Hole, Wyoming.
“They have a dual mandate,” Gross said, referring to the Fed’s directive of price stability and maximum employment. “Unemployment is still above 8 percent and it’s obvious that the Fed isn’t comfortable, nor is the nation or the economy with 8 percent unemployment going forward.”
Until the unemployment rate is in the low 7 percent range and inflation has risen above the Fed’s 2 percent target the fed is going to “ease quantitatively,” Gross said from Pimco’s headquarters in Newport Beach, California.

Earlier Rounds

The central bank bought $2.3 trillion of debt from 2008 to 2011 in two rounds of what’s become known as quantitative easing, or QE. It has also kept its benchmark interest rate at zero to 0.25 percent since December 2008 and has pledged to hold it there until at least 2014.
Bernanke said in a letter dated Aug. 22 to Representative Darrell Issa, a California Republican who chairs the House Oversight and Government Reform Committee, that the Fed has the ability to take additional steps to boost the economy.
Even if the Fed does do more to boost economic growth, the measures “will produce limited results,” Gross said. He expects the yield on the 10-year note to finish the year around its current level of 1.65 percent.
“It’s obvious that with each step the effects have been more and more limited, and from this point forward Ben Bernanke knows that the economic effects on equity and bond markets are going to be limited,” he said. “I don’t see the yield changing until the Fed suggests they might raise interest rates and until the Fed stops buying 10-year Treasuries.”
Gross has been predicting more easing by the Fed, betting that policy makers will consider additional purchase of securities such as mortgages to keep borrowing costs low for consumers. Mortgages, at 51 percent in July, are the largest holdings in his flagship Total Return Fund. (PTTRX)
The $270 billion Total Return Fund managed by Gross gained 7.8 percent during the past year, beating 97 percent of its peers, according to data compiled by Bloomberg. The fund gained 0.65 percent in the past month, beating 90 percent of its peers.
To contact the reporter on this story: Cordell Eddings in New York at
To contact the editor responsible for this story: Dave Liedtka at

Wen Tells Merkel Spain, Italy, Greece Need More Reforms

By Bloomberg News - Aug 30, 2012 10:34 AM GMT+0400

Chinese Premier Wen Jiabao told visiting German Chancellor Angela Merkel that Spain, Italy and Greece must take “comprehensive measures” to prevent a worsening of the euro zone’s sovereign debt crisis.
“The main worries are two-fold: first is whether Greece will leave the euro zone,” Wen said in remarks at Beijing’s Great Hall of the People. “The second is whether Italy and Spain will take comprehensive rescue measures: resolving these two problems rests with whether Greece, Spain, Italy and other countries have the determination for reform.”
Angela Merkel, chancellor of Germany, center right, tours the Nanluoguxiang hutong in Beijing, China, on Thursday, Feb. 2, 2012. Merkel is on a two-day official visit. Photographer: Nelson Ching/Bloomberg
Chinese Premier Wen Jiabao told visiting German Chancellor Angela Merkel that Spain, Italy and Greece must take “comprehensive measures” to prevent a worsening of the euro zone’s sovereign debt crisis.
Wen Jiabao, China's premier, right, and Angela Merkel, Germany's chancellor attend the welcoming ceremony at the Great Hall of the People in Beijing. Photographer: Mark Ralston/AFP/Getty Images
Europe’s slump is deepening as governments struggle to restore investor confidence and companies eliminate jobs. Economies are stalling or contracting amid concern about a possible Greek exit from the euro and the ability of Spain andItaly to service their debts.
Wen said he was more confident about the euro zone after meeting today with Merkel. Their meeting coincided with the signing of a $3.5 billion agreement for China to buy 50 Airbus SAS A320 aircraft, one of more than 10 agreements signed today, the official Xinhua News Agency reported.
In addition to winning contracts for German companies, Merkel is aiming to convince Wen and other Chinese leaders that the euro zone is a good place to invest. Gross domestic product in the 17-nation currency bloc fell 0.2 percent from the first quarter, when it stagnated, the European Union’s statistics office in Luxembourg said August 14.
“Recently, the European debt crisis has continued to worsen giving rise to serious concerns in the international community,” Wen said. “Frankly speaking, I am also worried.”
To contact Bloomberg News staff for this story: Michael Forsythe in Beijing at
To contact the editor responsible for this story: Peter Hirschberg at

Wednesday, 29 August 2012

Italian Bond Rally Weakens Monti’s Hand With Merkel: Euro Credit

By Andrew Frye - Aug 29, 2012 1:16 PM GMT+0400

German Chancellor Angela Merkel walks with Italian Prime Minister Mario Monti following their 
meeting at Villa Madama, in Rome, on July 4, 2012.

Italian Prime Minister Mario Monti’s campaign for collective action to fight Europe’s debt crisis may be compromised by falling bond yields as he meets German Chancellor Angela Merkel.

Aug. 29 (Bloomberg) -- Piero Ghezzi, head of economics, emerging markets and currency research at Barclays, talks about the European Central Bank's bond-buying program and the outlook for the euro. He speaks with Mark Barton on Bloomberg Televsion's "On the Move." (Source: Bloomberg)
Italy’s credit is as good as it has been in three months, according to the nearly 1 percentage point decline in 10-year bond yields from 6.7 percent on July 25. That may make it easier for Merkel, who is hosting Monti in Berlin today, to sidestep the Italian premier’s proposal for the region’s rescue funds to buy bonds with the support of the European Central Bank.
“Monti’s arguments have more force when yields are spiking in spite of the fact that his government has implemented a number of credible reforms,” said Mujtaba Rahman, an analyst at Eurasia Group in New York. “It is at this moment when his argument carries more thrust with the Germans.”
Monti, 69, is on the road as European leaders prepare for the next phase of fighting a crisis that started with Greece three years ago and spread to Ireland, Portugal and Spain. Italy, which is due to sell $21 billion of debt in the next two days, still pays about 1 percentage point more to borrow for a decade than the average for the last five years. Monti said he may request the bond buying to bring down those funding costs, while seeking to limit any conditions the European Union would try to impose.
“Certainly I don’t want Italy, after all the efforts we have made which are producing results, to be subjected to some sort of intrusive special administration like has happened with the countries that needed aid to balance their accounts,” Monti said in an interview published in Il Sole 24-Ore today. “We are not in that situation.”

Pressure Easing

Italian 10-year yields rose 3 basis points to 5.86 percent today. Spanish yields of similar maturity debt gained 7 basis points to 6.55 percent, while the German rate fell was little changed at 1.34 percent.
The pressure on Monti has eased since July thanks to pledges of support for future EU bond-buying efforts from ECB President Mario Draghi, and the German government’s diminishing opposition to bond-market intervention by the central bank. Investors have made a total return, including reinvested interest, of 6.5 percent on Italian bonds since July 24.

Demand for Bonds

“There is demand for Italian paper, but still on the very short-term part of the curve,” said Nicola Marinelli, who oversees sovereign and high-yield debt in a $160 million fund at Glendevon King Asset Management in London. “There is still the risk that the demand for bonds can collapse if we get the wrong kind of news out of Italy.” Marinelli doesn’t own Italian or Spanish government debt.
The ECB may use its funds to lower yields if Italy and Spain request such aid, Draghi has said. The central banker is expected to give details of the bond-buying plan and possibly lay out what type of conditions the ECB would demand in return when the Governing Council meets on Sept. 6. Still, Bundesbank President Jens Weidmann this week reiterated his opposition to ECB bond buying, saying in an interview with Der Spiegel that it “can become addictive like a drug.”
“Preventing the ECB from buying government bonds to address imbalances, as the Bundesbank is trying to do, could end up, particularly in the case of German, becoming an own-goal with paradoxical effects,” Monti said in the Sole interview referring to a soccer play who accidentally puts the ball into his own net.

Debt Load

Bringing down funding costs is critical for Italy, which has a debt of almost 2 trillion euros ($2.5 trillion), the euro- region’s second biggest in nominal terms after Germany. The Treasury still has to finance 165 billion euros of maturing bonds and bills this year, more than three times the level faced by Spain.
Italy sold 3 billion euros of zero-coupon 2014 debt yesterday to yield 3.064 percent, down from 4.86 percent at the previous auction on July 26, as investors bid for 1.95 times the amount offered, compared with 1.78 times last month. The results were “relatively good,” Annalisa Piazza, fixed-income analyst at Newedge Group in London, wrote in a note to investors.
Today’s planned 9 billion-euro auction of six-month bills precedes the sale of as much as 7.5 billion euros of five and 10-year bonds tomorrow.

Threat to Euro

Monti was helped in negotiations with Merkel earlier this year when advances in Italian yields prompted speculation that the 17-country euro group could break up. Merkel was persuaded at a June 28-29 meeting of euro-area leaders to allow Monti’s push to grant the region’s bailout funds more flexibility in coming to the aid of nations like Spain and Italy, who are bringing down their deficits and still facing high financing costs.
Support for Merkel has been increasing in Germany as European leaders prepare for what the chancellor called a “decisive phase” in their crisis fighting efforts. Merkel’s Christian Democratic Union and its Bavarian sister party climbed three percentage points to 39 percent, the highest since July 2008 and since the incumbent coalition was formed, according to the weekly Forsa poll for Stern magazine and broadcaster RTL published today.
To contact the reporter on this story: Andrew Frye in New York at;
To contact the editor responsible for this story: Mark Gilbert at

Monday, 27 August 2012

Asian Stocks Fall On Japan Growth Downgrade, Fed Policy

By Jonathan Burgos - Aug 28, 2012 8:06 AM GMT+0400

Asian stocks fell, with the regional benchmark index heading for a three-week low, after Japandowngraded its assessment of the world’s third-biggest economy and as investors await indications of policy direction from the Federal Reserve.
Shikoku Electric Power Co. (9507) sank 8.5 percent in Tokyo after Credit Suisse Group AG rated the stock underperform. China Southern Airlines Co. fell 4.2 percent in Hong Kong as Asia’s biggest carrier by passenger numbers reported first-half profit tumbled. Newcrest Mining Ltd. slipped 3 percent in Sydney after saying production at its Lihir gold mine in Papua New Guinea was suspended amid a dispute with landowners.
The MSCI Asia Pacific Index (MXAP) dropped 0.6 percent to 119.14 as of 1:04 p.m. in Tokyo, heading for its lowest close since Aug. 6. About two shares fell for each that rose on the gauge. The measure climbed 10 percent from a June low through yesterday on bets the U.S., Europe and China will take action to propel economic expansion. Investors are awaiting Federal Reserve Chairman Ben S. Bernanke’s speech on Aug. 31 at an annual economic symposium in Jackson Hole, Wyoming.
“There’s no fundamental basis in doing another quantitative easing,” said Khiem Do, Hong Kong-based head of multi-asset strategy at Baring Asset Management (Asia) Ltd., which oversees about $8 billion. “The U.S. economy has pretty good momentum.”
Spending by U.S. consumers probably climbed in July by the most in five months, easing concern the biggest part of the economy is backsliding, economists said before a report on Aug. 30. Revised second-quarter gross domestic product to be released tomorrow by the Commerce Department may show the world’s biggest economy grew faster than initially estimated.

Japanese Economy

Japan’s Nikkei 225 Stock Average (NKY) lost 0.6 percent, reversing earlier gains of as much as 0.6 percent. The government lowered its assessment of the Japanese economy, cutting its view on personal consumption, home-building, exports, imports and industrial production, according to a monthly report released by the Cabinet Office in Tokyo today.
South Korea’s Kospi slid 0.3 percent, while Hong Kong’s Hang Seng Index fell 0.2 percent. China’s Shanghai Composite Index and Australia’s S&P/ASX 200 Index both added 0.1 percent.
Futures on the Standard & Poor’s 500 Index slid 0.2 percent today. The gauge fell 0.1 percent yesterday amid doubts the Federal Reserve will announce further economic stimulus.

Bernanke Speech

Bernanke probably won’t use his Aug. 31 speech at the Fed’s annual symposium in Jackson Hole to suggest a third round of bond buying is at hand, according to economists such asMichael Feroli at JPMorgan Chase & Co. and James O’Sullivan at High Frequency Economics.
The MSCI Asia Pacific Index fell 7.1 percent from this year’s high on Feb. 29 through yesterday. Stocks on Asia’s benchmark index were valued at 12.5 times estimated earnings on average, compared with 13.7 for the S&P 500 and 11.7 for the Stoxx Europe 600 Index, according to data compiled by Bloomberg.
Shikoku Electric lost 8.5 percent to 1,021 yen. Kyushu Electric Power Co. declined 7.4 percent to 640 yen. Credit Suisse rated both utilities underperform in new coverage of the shares.
China Southern Airlines retreated 4.2 percent to HK$3.45 as first-half profit slumped 85 percent.
Newcrest Mining, Australia’s largest gold producer, lost 3 percent to A$26.41. A dispute with the Lihir Mining Area Landowners Association required the plant to be suspended until differences are resolved, Newcrest said today in a statement.
Aozora Bank Ltd. (8304) surged 16 percent to 243 yen, the most since November 2008, after the lender said it plans to repay public funds.
To contact the reporter on this story: Jonathan Burgos in Singapore at
To contact the editor responsible for this story: Nick Gentle at

Japan Cuts Economic Assessment As BNP Says Contraction Looms

By Andy Sharp and Keiko Ujikane - Aug 28, 2012 5:29 AM GMT+0400

Japan’s government downgraded its assessment of the world’s third-biggest economy for the first time in 10 months as some analysts forecast that gross domestic product will shrink this quarter.
Risks include a “further slowing down of overseas economies and sharp fluctuations in the financial and capital markets,” the Cabinet Office said in a monthly report released in Tokyo today. It cut an evaluation of the global economy.
The government cut its view on personal consumption, home-building, exports, imports and industrial production, while raising its assessment of the labor market. Photographer: Tomohiro Ohsumi/Bloomberg
The government lowered its view on personal consumption, home-building, exports, imports and industrial output, while raising its assessment of the labor market. The Bank of Japan (8301) next meets on Sept. 18 and 19 to review monetary policy, while global investors are awaiting an Aug. 31 speech by Federal Reserve Chairman Ben S. Bernanke to gauge the outlook for stimulus in the world’s biggest economy.
Europe’s debt crisis is having the effect of a body blow to Japan’s economy,” said Yoshimasa Maruyama, chief economist at Itochu Corp. (8001) in Tokyo. “Concerns over Japan’s economic outlook will probably build pressure on the BOJ to apply more monetary stimulus,” said Maruyama, who says the central bank could move in October.
JPMorgan Securities Japan Co. forecasts a 0.3 percent annualized decline in gross domestic product in the three months through September, while BNP Paribas SA estimates a 0.9 percent fall. The median estimate in a Bloomberg News survey compiled this month was for 1 percent growth, partly supported by earthquake reconstruction work.
The Nikkei 225 Stock Average fell 0.2 percent as of 10:20 a.m. in Tokyo. The yen gained 0.2 percent to 78.56 per dollar.

Global Weakness

Grappling with the world’s biggest public debt burden, Japan’s government is also at risk of a financing crunch.
Finance Minister Jun Azumi said today that government funds may “dry up” up if a financing bill fails to pass in the upper house of parliament. “We’d have to consider how to save money while trying to avoid affecting Japanese people’s lives as much as possible,” he said.
“The Japanese economy is on the way to recovery at a moderate pace, partly due to reconstruction demand, while some weak movements are seen recently,” the Cabinet Office said. The government lowered its economic evaluation of the U.S., Europe, China, the rest ofAsia except India, and said Japan’s overseas shipments are “growing weaker.”
European austerity measures, U.S. unemployment and China’s slowdown are weakening global demand. Japan’s bigger-than- forecast trade deficit in July and slowing economic growth in the second quarter highlighted pressure on the Bank of Japan and the government to add stimulus.
In the labor market, there are “signs of improvement, although some severe aspects still remain,” the government said today. Japan’s unemployment rate fell 0.1 percentage point to 4.3 percent in June, while the jobless rate for people aged 15 to 24 dropped 0.9 point to 7.4 percent.
The government will work with the central bank to counter deflation, it said.
To contact the reporters on this story: Andy Sharp in Tokyo at
Keiko Ujikane in Tokyo at
To contact the editor responsible for this story: Paul Panckhurst at

Spain Deficit Pain Bites Consumers In Prelude To Rajoy Austerity

By Angeline Benoit - Aug 27, 2012 10:26 AM GMT+0400

Mariano Rajoy, Spain's prime minister, speaks during a news conference with 
Mario Monti, Italy's prime minister, in Madrid, Spain.
Angel Navarrete/Bloomberg

Spanish Prime Minister Mariano Rajoy’s austerity drive will intensify this week as a sales-taxincrease tightens the squeeze on consumers whose spending is already plummeting.
The move to raise the value-added tax Sept. 1 will follow a flurry of data showing the pressure building on household finances in the euro area’s fourth-biggest economy, home to a third of its unemployed. Reports due include mortgage lending today, a breakdown of second-quarter gross domestic product tomorrow, inflation on Aug. 30 and retail and current-account data on Aug. 31.
Spain’s government will also release public finance figures illustrating the extent of Rajoy’s challenge as he tries to curb the euro region’s third-largest budget deficit and considers whether to seek further international aid. Consumers have already endured a recession lasting three quarters as a prelude to his tax increase due this week and an annual cut in public wages for the month of December.
“I expect a fairly dramatic weakening of GDP in the third and fourth quarters and further ahead as all components of domestic demand fall,” Ebrahim Rahbari, a London-based Citigroup Inc. economist, said by telephone. “Fiscal tightening will hurt substantially in Spain, and most of its effects are still to come.”
Rajoy last month abandoned his forecast for a return to growth in 2013 as he unveiled spending cuts and tax increases through 2014 that will triple his planned austerity effort to a total of 15 percent of annual gross domestic product. New measures starting in September will add 102 billion euros to the 48 billion-euro adjustment initially planned for this year, which began taking effect in the second quarter.

Deficit Target

The yield on Spain’s 10-year benchmark bond rose to a euro- era intraday record of 7.75 percent on July 25 on investor concern Rajoy may miss his deficit target of 6.3 percent of GDP this year. Spain aims to bring the shortfall within the European Union limit of 3 percent of GDP in 2014. The bond yield was at 6.45 percent as of 4:34 p.m. in Madrid on Aug. 24.
Rajoy’s forecast for a 0.5 percent economic contraction next year is still optimistic, according toRicardo Santos, a London-based economist at BNP Paribas SA, who sees it being three times as deep. He says tax revenue will miss government estimates while unemployment increases, raising the cost of welfare.
“The Greek example shows there is a risk of a downward spiral that can leave the economy stuck in a depression,” said Christian Schulz, an economist at Berenberg Bank in London.

Consumer Squeeze

GDP data tomorrow may show how consumer spending already suffered during the second quarter. The report from the national statistics institute, INE, follows a July 30 estimate showing Spain’s recession worsened with a 0.4 percent contraction. The government forecasts domestic demand will fall 4 percent this year, more than twice last year’s drop.
Mortgage data at 9 a.m. today in Madrid and retail statistics on Aug. 31 will also signal the weakness in household finances. The retail sales figures for July follow a 5.2 percent annual decline in June, while the home-loans report will show whether residential mortgages fell further in June after a 30.5 percent drop from a year earlier in May.
Adding to pressure on consumers is the VAT increase, the second since 2010, which will raise the levy to 21 percent from 18 percent. It’s the first item to take effect as part of Rajoy’s fourth budget-tightening exercise in eight months. Along with a one-month wage cut for civil servants and a reduction in jobless pay, it will account for most of the extra measures he has sought to curb the deficit this year.

Inflation Risk

Higher sales tax risks “exacerbating” the slump in domestic consumption and sparking a spiral in which prices feed wages, said London-based economist Andrew Benito at Goldman Sachs Group Inc., a former Bank of England specialist on consumer spending.
Consumer-price gains are already accelerating. The inflation rate rose to 2.2 percent in July because of higher costs of drugs and increases in local taxes, and probably reached an eight-month high of 2.3 percent this month, according to the median forecast of 10 economists in a Bloomberg News survey.
More tax increases may follow this year as the 17 semi- autonomous regions and over 8,000 municipalities add the cost of a higher sales tax to the adjustments they’ve been assigned that represent 73 percent of the nation’s budget-cutting effort this year. The Madrid subway will raise prices again after increasing its 10-trip ticket 29 percent last May to 12 euros ($15).

Spiralling Costs

The cost of bailing out regions and town halls, along with a backlog of unpaid health-care bills and lower tax receipts, already pushed Spain’s central government to exceed in June its deficit limit for the whole year. The Budget Ministry will release the central government’s balance through July on Aug. 31, before regional second-quarter data is provided in September.
“The data we already have, more than halfway through the year, show it’ll be difficult to meet targets,” said Jose Antonio Herce, a public administrations consultant with Madrid- based firm Analistas Financieros Internacionales. “There is no time to lose to implement all the adjustment measures we can.”
To contact the reporter on this story: Angeline Benoit in Madrid at
To contact the editor responsible for this story: Craig Stirling at