By Jack Duffy

PARIS (MNI) – Whenever the focus of the debt crisis has shifted to
Spain, Spanish officials have had a ready answer. Government debt in
Spain, they would say, is well below the Eurozone average.

And it’s true, at least judging from the official figures. Spain
ended 2011 with central government debt equal to 68.5% of GDP. That
compares with a euro-area average of 86.8, according to Citigroup.

But the problem for Madrid is that the official figures are seen as
increasingly less reliable. With the bill to clean up the country’s
faltering banks expected to rise well above the E52 billion that Prime
Minister Mariano Rajoy has planned, markets worry that Spain’s debt may
suddenly explode the way Greece’s deficit seemed to in 2009.

According to some analysts, the signs are already there. Edward
Hugh, a Barcelona-based economist, has calculated that Spain’s
public-sector debt is really around 90% of GDP and that, on its current
trajectory, it will surpass 100% within two years.

“Spain has had a very effective public relations effort” regarding
its debt, Hugh said in an interview. “But with the cost of cleaning up
the banking mess, that is going to be much harder to do.”

In his analysis of Spain’s debt ratio, Hugh adds 7 percentage
points for the more than E70 billion in unpaid bills by central,
regional and municipal governments; 5 percentage points for around E57
billion in public debt owned by state pension funds; and 5 percentage
points for E57 billion in public company debt.

And lastly, Hugh adds 4 percentage points for the category of
“contingent liabilities,” into which the bank bailout costs may fall,
although he admits that amount is hard to estimate at this point.

It is not unusual for governments’ overall debts to be higher than
official figures. But in Spain’s case, the combination of a shrinking
economy, 23% unemployment and a tottering banking system has led to
concern that it will not be able to support the load.

Citigroup, in a report issued Wednesday, said that “Spain is
likely, in our view, to be pushed into a troika program of some kind
during 2012, possibly by losing access to market funding on affordable
terms, but more likely by the ECB making a program for the Spanish
sovereign a condition of its continued willingness to fund the Spanish
banks.”

Rumors, driven by Spanish media reports, have already begun to
circulate that European leaders are urging Spain to tap the European
Financial Stability Facility for funds to recapitalize its banks.
European Commission and Spanish officials were quick to deny the
reports, but the doubts persist.

Even with massive purchases of Spanish government bonds by the
country’s banks — presumably using money borrowed from the ECB —
Spanish yields have been rising. After touching a low of 4.83% in
February, Spain’s 10-year bond yielded 5.33% on Wednesday.

Against this backdrop, Rajoy will present the government’s 2012
budget on Friday. With a goal of bringing Spain’s deficit from 8.5% of
GDP in 2011, to 5.3% this year and 3% in 2013, he has already pledged
that it will be “very, very austere.”

Hugh, the Barcelona-based economist, warns that an excessive focus
on deficits can lead people to miss the bigger picture, including the
level of economic growth.

“At the end of the day,” he said in a recent blog post, “deficits
are only interesting as they add to debt, and in the long run what
matters — as we have seen in the Greek case — is whether or not the
debt itself is sustainable.”

(EuroView is an occasional column written by Market News
International editorial staff. Any views expressed are solely those of
the writer)

–Paris newsroom, 33142715540; jduffy@marketnews.com

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