There was a time when countries would use Goldman's "innovative" currency swaps to hide billions of debt off the books. Those days are gone. Now governments, at both the state and regional level, just outright lie about what their deficit and debt is. Case in point, Spain's Castilla La Mancha region, best known for being the stomping ground for one Don Quixote, where the cities of Toledo and Albacete are located, has just announced that it has "a budget deficit more than twice as large as previously thought, raising new concerns over the true state of regional finances and helping to send Spain's risk premium to new historic highs. Castilla La Mancha President Maria Dolores de Cospedal said her government will present Tuesday the first results of the audit she announced after being elected in nationwide regional and municipal elections on May 22." What? Politicians lying about the state of their finances only for it to be uncovered that things are 100% worse? Say it isn't so. And why on earth couldn't Spain just open a local branch of the BLS: it would have absolutely no problem hiding its manipulated economic data. Too late now...
More on this latest "discovery":
"With the debts we've found unpaid as of June 30, the deficit is much higher than we were told," Ms. Cospedal said in an interview with Onda Cero radio station. "Tomorrow we will see the exact figure... but it will likely be much higher than 4%," added Ms. Cospedal, who is also the No. 2 national official of the opposition Popular Party.
The outgoing regional government of Socialist José Maria Barreda had said Castilla La Mancha had a budget deficit equal to 1.78% of local gross domestic product in April, well in excess of the 1.3%-of-GDP limit for 2011 set by the central government in Madrid for each of Spain's 17 regions.
Roberto Ruiz, UBS strategist in Madrid, said the news on Castilla La Mancha "fanned the flames" of worries over Spanish finances. Largely the result of increased investor unease over Europe's inability to solve Greece's financial problems, Spanish and Italian risk premiums—as measured by the spread of their 10-year government bond yields over the German benchmark—soared to new record highs Monday.
The damage was swift and brutal: "The yield premium investors demanded to hold Spanish paper surpassed three percentage points for the first time since the creation of the euro in 1999."
Granted, Castilla is not big in the grand scheme of things, as it is the least populous region of Spain. "Castilla La Mancha, which reported a 2010 budget deficit of 6.5% of GDP, the highest of all Spanish regions, was already known to have deep financial problems. And it is a relatively small region that accounts for just 3.4% of national GDP. Still, its revelation of a worse-than-expected deficit "shows a dangerous trend," Mr. Ruiz said." The problem is that as everyone knows, there is never one cockroach.
So who's next? Perhaps the bond vigilantes can grant a 1 month reprieve for the next offender if their step up. Of course, the end result will be one and the same anyway. And it does kinda put the whole "modelling" paradigm into question. But at least there is no concern that Europe's stress tests will be credible.
After all, Italy which just blew up, saw all of its banks pass the second, and far more credible version.