growth, and its impact on the budget.As a result, we forecast an increase in net government debt to 61.6% of GDP in 2011 and 65.0% in 2012, from anestimated 56.2% in 2010. Further growth in borrowing costs could result in higher interest outlays than thegovernment currently plans, although the increase in the average interest rate on Spain's outstanding governmentdebt in 2010 was negligible (3.69%, versus 3.53% in 2009 and 4.32% in 2008)--despite negative marketsentiment--thus limiting the potential additional burden on the budget. Our current government debt projection doesnot include the anticipated income from the announced partial privatization of the airport operator AENA and theNational Lottery. Similarly, it does not include potential additional capital injections by the state to furtherstrengthen the financial sector. In our opinion, such costs could surpass €20 billion--a level recently mentioned bythe government--with the excess driven either by higher-than-expected losses in financial institutions'property-related loan portfolios; failure of financial-sector entities involved in integration processes to reduce theiroperating expenses; or higher funding costs, since, in our opinion, the financial sector's approximate €760 billion of gross external debt at year-end 2010 leaves it vulnerable to exogenous shocks.We believe that in the medium to long term, the recently adopted pension reform program, if fully implemented, willlikely lead to important savings in social security outlays. The reform program includes increases in the retirementage--to 67 for standard retirement and 63 for early retirement--an extension of the pension calculation period to 25years from 15, and the introduction of a "sustainability factor" linking the financial sustainability of the pensionsystem to the future evolution of life expectancy. While it is too early, in our view, to assess the impact of laborreform on Spain's economic growth prospects, we believe that the reform measures implemented to date are a stepin the right direction, though stopping short of a fundamental overhaul of the labor market. Additional labor reformmeasures planned by the government for the first quarter of 2011 in the areas of active market policies andcollective bargaining procedures could, however, further reduce some of the structural rigidities that we believeconstrain labor demand in the economy.
The negative outlook reflects the possibility of a downgrade if Spain's fiscal position deviates materially, in ouropinion, from the government's budgetary targets for 2011 and 2012. A downgrade could also occur if theimpending correction in private-sector leverage results in what we would consider to be a disorderly adjustment inthe financial sector, leading to a sharper deterioration of the Spanish government's balance sheet or lower economicgrowth than we currently anticipate, possibly coupled with resurging deflationary pressures. Moreover, we couldlower the rating if vulnerabilities persist related to external financing conditions or delays in the implementation of structural reforms.Conversely, we could revise the outlook to stable if the government meets or exceeds its budgetary objectives in2011 and 2012, risks to external financing conditions subside, and Spain's economic growth prospects prove to bemore buoyant than we currently envisage as a result of a smooth economic adjustment and restructuring process.
Kingdom of Spain - Selected Indicators
2004 2005 2006 2007 2008 2009 2010 2011e 2012f 2013f 2014fMedianAA
GDP per capita ($) 24,660 26,260 28,219 32,423 35,197 31,949 30,548 32,150 31,366 31,964 32,572 45,742
855689 | 300989331
Spain (Kingdom of)