Spain’s scratch-card solution
It doesn’t get much worse than a state like, say, Spain, borrowing money through a lottery. Well, maybe actually it does, as Spain’s state-owned lottery is seeking a €6bn (US$7.3bn) loan from a syndicate of international lenders to fund its contribution to a bailout pot for cash-strapped regional governments.
That’s right, Spain’s solution to its debt problem is leveraging up its lottery. The only thing that would make this scheme more emblematic of Spain’s desperation is if the plan was to plough the €6bn back into tickets for the annual Christmas draw – El Gordo – and live happily ever after on the winnings.
Instead, Spain’s Sociedad Estatal Loterias y Apuestas del Estado, SA (SELAE) is contributing to an €18bn fund which will be available to provide emergency funding to hard-hit regional governments. The Spanish treasury is supplying the remaining €12bn. The fund, announced two weeks ago, already has one supplicant, the region of Valencia which on Friday asked for aid of €3.5bn. Catalonia is mulling making an application, as assuredly are many other regions, which have struggled as the economy slumped and development flat-lined.
Spanish regional governments face re-financing needs between now and the end of the year which are almost the size of the entire fund, calling into question whether even lottery money will be enough.
This is the same country which brought you the ban on short selling, announced on Monday and likely to be as ineffective as bans in years past.
Spanish regional debt has more than doubled since 2008, and now is equal to about 13% of GDP.
Already in receipt of a proposed banking bailout, speculation has been rising that Spain will need a full-blow rescue from its European and international partners. This has driven Spanish borrowing rates to unsustainable levels, with 10-year yields on Wednesday at 7.38%, slightly below all-time highs set early in the week.
In March Spain was able to sell six-month Treasury paper at a yield of under 1%. Tuesday it had to pay 3.69%.
Spain considered and then shelved last September a public stock offering of SELAE, after market conditions deteriorated. While it is hard to predict how well subscribed the loan will be, it must be said to carry some very particular risks.
Lotteries are essentially state-licensed money printing machines, and while we don’t know the exact pledges Spain has or may make about SELAE’s exclusive rights to hold lotteries, we do know that Spain is desperate for money and may well be more so in a year or two. And, of course, there is always the risk that a loan made in euros becomes redenominated into new pesetas should the worst happen and Spain leave the euro.
And, of course, any region which taps the fund must make cuts in spending to allow it to repay it, a measure which will only deepen the savage contraction. On top of that they must give up future tax receipts.
Spain, like Greece, needs either hugely subsidised loans from Germany and the EU or, better yet, needs to see some of its debts simply vaporised
This is the real madness of Spain’s policy – it is looking for any leverage it can obtain, but at the same time following a totally counterproductive policy of austerity. Spain, like Greece, needs either hugely subsidised loans from Germany and the EU or, better yet, needs to see some of its debts simply vaporised. Europe and the ECB’s current policy will only bring on deflation and shrinking GDP, both of which will make the un-payable debts all the more a lost cause.
That’s really what financial markets are telling you when they hike Spain’s borrowing costs.
Spain itself is predicting a 0.5% contraction in 2013, a probably overly optimistic assessment. Government spending excluding interest payments will be 6.6% below the ceiling for this year, the government said last week. Included in those cuts is a 12% cut in funds for central government which suffered similar cuts just three months ago.
To be fair, the lottery is an asset and Spain, as the grantor of its license, has a right to the lion’s share of the proceeds. And indeed lotteries are supposed to be counter-cyclical, enjoying heightened popularity during tough times.
The whole approach, though, is wrong. Spain doesn’t need more debt, even if it is off-balance sheet. It needs less. It doesn’t need more spending cuts, it needs spending restored, at least until the death spiral can be arrested.
Unless we see a very generous rescue backed by Germany, or an out of character bout of targeted quantitative easing by the ECB, Spain will continue to be under pressure, and will itself pressure the euro project.
(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at email@example.com)