Controlling The Uncontrollable: Spain’s National Addiction To The Use Of “Dinero B”

Well, before we go any further, I would like to make clear that what I am going to talk about in this post is not anything illegal, or even irregular (things like this must be going on in almost all Euro Area countries even as I write). Bending of the rules? Perhaps. Taking them to their limit? Certainly.

What Spain’s central, local and regional government does is take advantage of loopholes in Eurostat accounting regulations to generate debt that really is debt, but is not classified as such according to the Eurostat excess deficit criteria. Key areas involved are debts on the balance sheets of state (or regionally, or locally) owned companies, overdue payments for receivables (very common practice in Spain), and public-private-partnership-type leaseback-arrangements. None of these are (typically) classified as debt, though they do all have to be paid at some point, which means there is a stream of revenue (flow) impact rather than a debt (stock) one (unless and until Eurostat changes the rules). Which means that while they do not impact that critical debt to GDP number, servicing these liabilities does exaccerbate the annual fiscal deficit one. Which is why ultimately bringing Spain’s fiscal deficit under control will almost certainly prove to be much harder work than it seems.

We are able to make this comparison since the Bank of Spain effectively maintains a double entry book keeping system, whereby it keeps one record under the National Financial Accounts of the total debt , while at the same time keeping a separate record of debt as classified for the EU Excess Deficit Procedure.

As we can see in the chart below, total gross government debt in Spain as classified in the Financial Accounts was some 751 billion euros (or around 75% of GDP), as compared with the 585 billion (or around 58% of GDP) in gross debt recognised under the EU excess deficit procedure classification.

Now if we look at the chart below, we will see that the proportion of Spanish national debt which remains outside the Eurostat classification system has risen since the introduction of the euro – from 14 to around 23 per cent – but most of the increase actually took place in the run up to the crisis. So as Spains funding problem has deteriorated, there does not seem to be any direct evidence that this has impacted the level of “non-accounted” debt, it has simply remained the same (in % terms). Of course, as the debt itself has balooned, so too has the “dinero B” part.

In the case of the regions (Spain’s Autonomous Communities) the position is not that different – the % has increased from 12% in 2000 to around 25% at the present time – even if there is rather more evidence of “stress” on their finances after the start of 2008 (see chart).

The position of Spain’s local authorities is also similar – with the proportion of “non-accounted” debt rising from 14 to about 23% – although again, there is even more evidence of post-crisis financial stress if we look at the gap between the two lines, and how it widens, which is none too surprising when you consider that it was the local authorities who lost the biggest chunk of their financing with the collapse of the construction boom. Indeed, it is my impression that in this case the gap only hasn’t widened further due to the fact that very few people are now willing to give any sort of credit to Spain’s local authorities.

As I indicate, one of the easiest ways of “kicking the can down the road” in terms of public finances, is to delay payment on receiveables (if you are not sure what receivables are, check this wikipedia entry), and the following charts show the relentless use of this procedure in Spain, despite the promise of Spain’s government to bring short term credit under control by 2013, there is no sign of this happening to date.

The other big area of “non-accounted” debt, is that accumulated by governmentally owned or “satellite” companies (who may for example run public transport, or outsourced cleaning services for local authorities). As can be seen from the charts below, this debt has increased massively since the crisis started.

As I say at the start of this post, none of this debt is hidden, nor is it illegal under Eurostat regulations, so there is nothing (in principle) out-of-order here. This fact doesn’t make the situation any less preoccupying, since one way or another all this debt will have to be paid. What its continuing presence does, I think, indicate, is the existence of some degree of “laissez faire” attitude towards fiscal targets on the part of the EU Commission and indeed the IMF (as I argue in this post, it is hard to understand the IMFs own Spain growth forecasts and CA deficit levels if they are not assuming a rather higher level of indebtedness into the future than anyone is prepared to admit right now) . The May measures are deemed to have worked. Europe’s Soveregin Debt Crisis is, if not over, at least in abeyance.

Symptomatic of the current “relaxed” state of things is the fact that only last week José Luis Rodríguez Zapatero, the Spanish prime minister, even started to air the possibility of reversing some of the spending cuts his government announced in May. In a cautious statement, which the FTs Victor Mallet reports was apparently aimed at testing the mood of financial markets, Mr Zapatero said the government expected to restore some suspended infrastructure investments if – as the government anticipated – renewed financial stability left room for manoeuvre in the 2011 budget. There is nothing here about growth, please note.

“In 10 to 15 days we will be able to give some positive news in relation to restoring investment activity in infrastructure, which will affect most regions and would provide relief, an important boost, to construction companies,” he told a news conference in Mallorca after meeting King Juan Carlos at the monarch’s summer residence.

A €6bn cut in public sector investment was among the biggest austerity measures announced by Mr Zapatero in May to coincide with the EU and IMF announcement of a €750bn financing facility for the eurozone.

Despite the fact that among the evident losers in what was effectively a “U turn” at the ECB in May were the monetary hard-liners like Jürgen Stark and Axel Weber, you obviosuly can’t keep a good man down, and European Central Bank Executive Board member Stark was out again on Monday, warning in the columns of the Financial Times that the European Union is all set to ramp up economic surveillance to prevent a repeat of the region’s recent debt crisis. “A new framework for macroeconomic surveillance will monitor whether national trends are compatible with those that are appropriate for the Union as a whole”, he said. “This framework will allow both targeted peer pressure and differentiated and more binding recommendations on follow-up action at the national level.”

All I can say looking at the above numbers is, there isn’t much sign of any of this being operational yet, but then, as I say, the Jürgen Starks of this world have rather had their noses pushed out of joint in recent weeks.

This entry was posted in A Fistful Of Euros, Culture, Economics: Country briefings, Economics: Currencies by Edward Hugh. Bookmark the permalink.

About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

14 thoughts on “Controlling The Uncontrollable: Spain’s National Addiction To The Use Of “Dinero B”

  1. Fiscal deficit and public debt are not equivalent, just as a corporation can have debt while making profits.

  2. Who cares about the bloody excess-deficit procedure? Even hearing the phrase is hilariously 90s. It’s Kohl era German virtue-wanking in an age of depression.

  3. Karl – Gov. Inc. always makes profits as it just goes and takes money off people , which once spent , in some roundabout unmeasurable way , is supposed to be good for the overall economy – which it obviously is as it accounts for around 50% GDP (!?) The fiscal deficit is a (planned sometimes ?) miscalculation by government whereby it has not taxed enough out of people to pay for its spending (the private sector let them down?). It therefore has to borrow to cover the shortfall. Sometimes it just borrows anyway, and certainly is happy backing off book satellites, in fact anything that will either be profitable to it (and profitable to Gov. Inc. does not mean a successful business necessarily) or give more say. Which is why there are 6000 of the @ 8000 townhalls facing bankruptcy . Which is why (apart also from a belated, and now further delayed, law banning localities from assuming new debt) no one wishes to lend any more to them .

    Exactly what renewed financial stability ZP is talking of regarding infrastructure projects I don’t know – and I wouldn’t guess . Someone in Spain/EU must have reminded him of their importance (and the related jobs of several hundred thousand people). Whatever, the funding will incur debt as we are nowhere near fiscal surpluses (the Prof. of structured economics from Raymund Lull university here projected minus 9% GDP 2011 and 30% unemployment 2012)- or will be taxed out of people , as the government is increasingly reminding us they are to be raised .

    There you go again Alex. Excess-deficit procedure:

    Follow Germany’s example and flout the stability pact limits.
    Use the Spanish excess deficit to subsidize the purchase of German cars, stabilize banks that have German investment, and dare I say support infrastructure projects that have German funding through the likes of the EIB.
    “Targeted peer pressure” refers to understanding what part of the hierarchy one occupies and realizing that without submission to its values you are more ruined than if you do submit. It tends to be used when there is the possibility that some northern bank thinks a government will default on debt it owes it. As a sweetener the rest of the Eurozone will borrow some money for you to borrow from them (so you can pay some of them back).

  4. Hello Edward
    My name is Gawain. I have once run a mildly successful art and culture blog called heaven tree which you once honored by linking to it from your links page. I am contacting you because I have made a curious discovery lately. There has been a lot of nonsense published and broadcast in various European media over the last 4-5 years, usually by distinguished professors, regarding the European identity. The claims are generally speaking historicist, usually unfalsifiable, and their import is how different Europe is culturally from certain unidentified THEM. The single most striking aspect of all these productions is the general ignorance of the speaker about the said them (who are, of course, the usual suspects — mainly Asians and Africans). This is seems innocent enough, perhaps even noble — defense of old European culture, you know — Shakespeare, Bach, etc. — until one remembers that, of course, European history is littered with terrible consequences of these kind of theories whose point was to establish how irreconcilably different we (Germans, Poles, Russians, Macedonians, Serbs) are from everybody; and until one begins to ask himself what possible consequences might emerge from this ideology (will be ban art or literature for being insufficiently European?) Now, my little an d curious discovery is this: a certain European government (can you guess which?) is involved in propagating this drivel, funding innocently independent-looking think tanks to develop this ideology. Would you be interested in running here an article of mine on the matter? Thanks.
    Sir G

  5. Don’t you mean to say accounts payable, not receivable? Receivables are funds owed to you, and count as an asset, not a liability.

  6. Reader comments:

    “ESto de las Constructuras huele que apesta. Por estos lares todo el mundo engorda facturas con el fin de generar dinero B que se reparte en forma de comisiones (favores). Y siempre pagamos los mismos, un poco de dignidad por favor.”


    “veremos cuantos trabajadores se van a la calle por el recorte del 5% del beneficio en las contructuras porque siempre pagan los mismos…”

    received the highest votes in reply to :

    In English –

    Constructors stink. They inflate their bills to generate dinero B with which to pay “comissions”. It is always the same people who pay – a little dignity please.


    We will see how many workers are turned into the street due to the loss of 5% in earnings by the constructors (due to the spending cut backs – some estimates are in the hundreds of thousands of jobs), it is always the same who pay.


    Maybe ZP is also looking at the cost of paying unemployment benefits and headline figures vs. the cost of continued funding – for every hundred thousand unemployed the bill may be half a billion eu in extended benefits yearly. If so it is probably no more than an excuse as the reduction in the reduction of investment (as in the account of the account?) is now said to be only three hundred million of the original six billion euros.

  7. In,1518,712511,00.html

    Der Spiegel outlines the effects of austerity on Greece (or the effects of the credit bubble etc. if we look at it the other way round) . These are with a 1.5% 2Q GDP drop as a background, and unemployment at @ 12 % . Niño Becerra (Prof. Raymund Lull) predicts a 9% GDP drop for 2011 and 30% unemployment 2012 in Spain.

    There is still talk in Berlin of arrangeing for structured national defaults. What I have not seen written is exactly what may have happened if banks and then possibly countries were not bailed out – would such lead to chaos or merely a fast writedown in valuations and major losses to investors ? The pretexts for not allowing the adjustments seem false (i.e. problem only a temporary interbank lending freeze etc. based on confidence). Is northern Europe really capable of keeping the rest of Europe afloat ? Maybe Ed. would give his opinion ?

  8. moving debt out of sight of Eurostat is common in every member of the EU. A comparativ analasys would reveal a lot of Dinero B in Europe.

  9. Well here in Portugal de Government likes to sell Public Patrimony (buildings, schools etc) to Public firms. That way slashes the Deficit while not hiking the Debt since Public firms debt is outside State debt accounting…

  10. What the country saves and what the state saves:

    A recent article

    points out that the near 7 billion eu cut in infrastructure spending in Spain will only save 2.6 billion eu from the deficit due to reduced state revenue etc. I think that such a view is confusing however – the country has ‘saved’ the amount not borrowed, the government has ‘saved’ just over a third of that. Always this muddle between public and private expenditure and debt as if the government was the economy and public debt was not eventually taxed out of the private sector. Maybe the article should have been entitled ‘ways to justify expanding public debt beyond market and economic limits’. If they want to go Keynesian why complicate. Why don’t they just give money away to anyone, or monetize debt, might keep everyone happy for a while – you have the print, chuck us a few bob Trichet… ? Not likely.

  11. MM and Lucklucky said it right in their comments of August 19th and 20th. Moving debt out of the boundaries of what Eurostat accounts as such is a far too common practice in all European countries.
    And Italy makes no exception. A very common behavioural pattern here is to “externalise” the debt to the so-called “municipalizzate”, i.e. public-owned private companies (e.g. public transport companies, etc.), so that strictu sensu it is not accounted as local public debt.
    A few months ago it was presented in Milan “Comuni S.p.A.: Il capitalismo municipale in Italia”, a book denouncing this dangerous trend.
    I am afraid that this is only a creative way of SWEEPING PUBLIC DEBT UNDER THE CARPET, and that sooner or later this bubble will explode, as there is no such thing as a free lunch.

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