Fundamental Update: A quick guide to Spain’s 2013 Budget

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After waiting three hours for it, Spain finally delivered its 2013 Budget this afternoon. After some early remarks on car scrappage schemes and milk levies, the meat of the budget is that there will be EU 40bn of spending cuts next year, with government spending falling by approx. 8.9% compared with 2012.

The Spanish over-deliver, just

This is slightly larger than the EU39bn the market had been expecting and nearly 60% of the budget consolidation will come from spending cuts with the rest from tax increases. Overall, this budget is fairly underwhelming. Tax increases will fall on lottery winnings and a potential pension raid (although the details of this is still fuzzy). The government is trying to walk a tightrope between placating the EU authorities and also placating an angry public - the government wrapped up the press conference by saying that welfare spending still makes up 64% of this budget. 

A bailout by the back door?

It was over to Economy Minister De Guindos to say that the Spanish reform plan "exceeds the recommendations of the EU", which could be a back door way for Madrid to make a request for financial aid, although as yet Spain has still not made a formal application for funds.

The immediate reaction to this Budget could be fairly muted: firstly, it was delivered just as the markets were closing and Europe was going home, secondly, a lot of the detail was leaked and there is not that much new in the Budget.

Market reaction

The initial market reaction was volatile, EURUSD dipped to 1.2830 - the 200-day moving average and a key support level. However, since then the single currency has popped higher, at the time of writing it is above 1.2890. This pair could drift higher over the next 24 hours as the uncertainty of next year's Budget is out of the way. However, the gains could be fairly short-lived as some of the assumptions underpinning next year's budget - including tax take and growth assumptions - look a bit over- optimistic to us. Thus, we believe any move higher could be met with selling interest at the 1.3170 level - the double top from earlier this month.

Also watch out for the results of Spain's banking stress tests tomorrow. These are expected to show that the banking sector needs to be re-capitalised to the tune of EU 40-60BN, significantly below the EU100bn bailout that has already been approved by the EU for Spain's banking sector. As long as the re-capitalization requirements are below the EU100bn level then that should help sentiment towards the euro tomorrow.

Chart 1: EURUSD hourly - this cross has popped higher post Spain's Budget press conference. The short/term MACD is also pointing to a bullish crossover. We need to get above 1.2950 for this rally to have legs.  A weekly close above 1.30 tomorrow would be a very bullish development for this pair.

Source: Forex.com

Chart 2: EURUSD Daily:  1.3175 - the double top from early September - could thwart the bulls if this Iberian rally is sustained over the next few days.