Take 5 and come back tomorrow (20/8/24) Markets Government debt management Trade balance Government debt Renewables

None of what follows is investment advice.

Market environment: Waiting for the word – (Asia-Pacific markets rose with futures for Europe and the US mildly up) – Asia-Pacific markets rose after a strong US performance, with investors expecting signs from the Fed that interest rates will start to be cut soon. Futures for Europe and the US are modestly up.

Response to the crisis: Good government management, for once - ?(The Treasury cushions the effect of higher rates and pays an average rate of 2.2% on the government debt, at the highs since 2018 (Cinco Dias p13) – Debt management has been one of the positive examples of government action over the last years. A policy of extending the average maturity of the debt, by taking advantage of very low long term interest rates, has turned out to be a very effective tool to minimise the impact on debt service of the recent tightening of monetary policy. If only all government agencies had been managed with the same philosophy.

Trade balance: Less is more – (The trade deficit fell to €712.9m in June vs. €2.355bn in June 2023 on exports of €32.969bn -3.0% and imports of €33.682bn -7.3% (Ministry of Trade) – The sharp reduction in the trade deficit would seem to be positive. This said, part of the media tries to be more realistic and focuses on the decline in exports. I think it is more significant to note that the deficit declines despite the fall in exports due to the sharp slump in imports. The improvement in the deficit is basically due to the non-energy balance swinging from a €227m deficit to a €959m surplus, with the main driver being an 8.6% YoY fall in imports. The fall in imports of capital goods (-7.1%), cars (-11.8%) and consumer manufactured products (-7.5%) does not suggest strong domestic demand.

Government debt: Rising debt in a cyclical upswing is bad – (Government debt rises to €1.624tn in June (108.2% of GDP) vs. €1.6tn in May, exceeding the Government’s FY target (Expansion p16) – The rise in government debt throughout the year should not surprise as Spain is still running a budget deficit, although the level at each individual month also partly reflects the Treasury’s funding strategy. Note, however, that the rise in interest rates is not a major contributor to the rise in debt thanks to the past funding strategy that is delaying the reflection of current rates on the cost of debt (see Response to the Crisis). What is negative is that the debt is still rising as a result of the deficit despite record tax collection levels benefiting from current and past inflation as well as job creation. A rise in debt at a positive point in the cycle is not good news.

Renewables: Bad faith defence – (US courts deny Spain inmunity in the execution of arbitration decisions regarding renewables (Expansion p4) – The US courts have rejected Spain’s soverign inmunity claims in order to stop execution of three arbitration decisions. This could lead to Spanish assets being seized to carry out the required compensation. The Spanish government has the right to use all legal means to defend its interests, but claiming sovereign inmunity after having entered and lost arbitration looks like bad faith.