The spanish economy and the european crisis
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The spanish economy and the european crisis

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2012: another year characterized by risks and challenges, with Europe and Spain fallingbehind rest of the world on growth. ...

2012: another year characterized by risks and challenges, with Europe and Spain fallingbehind rest of the world on growth.

The new Stability Pact and the ECB's liquidity measures are positive steps forward butare not enough: a more credible firewall needed.

The Spanish economy is adjusting quickly. Substantial reforms, as the recent labormarket reform, needed to stimulate growth and reduce the unemployment rate.

Solvency problems are firm specific (real estate sector and few banks) and manageable.

It is all about liquidity: high dependence on financial markets and risks of self-fulfillingprophecies.

Create a virtuous circle (reduction of imbalances and reforms) to restore credibility andreduce uncertainty: crucial for positive effects of economic policy measures.

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  • 1. The Spanish Economy andThe European CrisisRafael DoménechCFA Spain Academy for Financial JournalistsJune 27, 2012
  • 2. The Spanish Economy and The European Crisis. June 2012ContentsSection 1International environment: continued global growth andthe European CrisisSection 2The Spanish economy at a crossroads Page 2
  • 3. The Spanish Economy and The European Crisis. June 2012Europe decoupling from global growthGDP growth (% yoy)Source: BBVA Research The debt crisis continues, with Greece under the 7 6 .4 spotlight and concerns about Spain 5.8 6 5 High levels of financial stress in Europe, with a risk 4.0 of credit restrictions 4 3.6 3 2.3 2.2 Stability Treaty: towards Maastricht 2.0. 2 More emphasis on growth 0 .9 1 Expansive, but no homogeneous, monetary 0 policies by the Fed, the Bank of England and the -­‐0 .2 ECB -­‐1 20 1 20 1 2 3 20 12 20 13 20 1 20 1 2 3 20 1 20 1 2 3 Global EMU USA EAGL ES A slow, heterogeneous and vulnerable recovery May-­‐12 Feb-­‐12 Page 3
  • 4. The Spanish Economy and The European Crisis. June 2012The European crisis continues Significant progress... ... but still with challenges ahead Restructuring of Greek debt and bringing 1. Access to financial markets forward the ESM Approval of the Stability Treaty 2. Need for efficient firewalls: Spain financial assistance and others Reforms in Portugal, Spain, and Italy 3. Growth agenda Long-term ECB liquidity provision 4. A clear road map towards a fiscal union and financial integration To date, the authorities have been a step behind the events à half measures to overcome the crisis Page 4
  • 5. The Spanish Economy and The European Crisis. June 2012The European crisis continues BBVA Financial Stress Index Source: Bloomberg and BBVA Research 3.00 2.50 2.00 1.50 US A E MU 1.00 0.50 0.00 -0.50 -1.00 -1.50 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Page 5
  • 6. The Spanish Economy and The European Crisis. June 20121. Access to financial marketsInterest rates and TARGET2Source: ECB and BBVA Research Differences in interest rates and the dependence on the ECB: two sides of the same coin Reducing financial tensions: a precondition for the success of fiscal adjustments and structural reforms The need for a political agreement Page 6
  • 7. The Spanish Economy and The European Crisis. June 20122. Need for efficient firewalls The financial assistance to Spain is a … that should be complemented with positive step … additional European measures The EUR 100bn of financial assistance is a Breaking up the correlation between sovereign . sufficiently high backstop, announced before and banking risk (SMP by ECB, EBA, …) the results of the stress tests Removes uncertainty about funding sources Efficient use of available resources by the ESMand increases the credibility of the restructuring to anchor markets expectations about the euro process and risk premia It differentiates Spain from the cases of other Short-run measures consistent with long-run peripherals like Greece, Portugal or Ireland objectives Page 7
  • 8. The Spanish Economy and The European Crisis. June 20122. Need for efficient firewalls Rick premium What is needed? What is the reallity? Exchange rate Clear roadmap to completely remove There are major disagreements the expectations of an euro break up between members. A winding road Fiscal policy Meeting fiscal targets to reduce the Public debt increases and doubts about increase in debt preferred status of EFSF/ESM Banking Banking union and direct capital Backstop + credibility … details still restructuring injection from ESM pending Growth A roadmap with a credible strategy for No news long-term growth Page 8
  • 9. The Spanish Economy and The European Crisis. June 20123. Growth plan A growth plan that complements fiscal adjustment Clear route map for the future of EMU Balance between growth and austerity: reforms in exchange for a growth strategy Gradual fiscal adjustment with multi-year plans. Focus on structural deficits as the Treaty proposes Short-term objective: to avoid the risk of an austerity-recession vicious circle and the doubts regarding sovereign debt solvency Page 9
  • 10. The Spanish Economy and The European Crisis. June 20124. A clear road map towards a fiscal and financial union European EFSF & ECB ESM Treasury Eurobonds Very short run Short to medium Long run run EFSF ESM European Governments Banks banking union Very short run Short to medium Long run (if ESM not ready) run Page 10
  • 11. The Spanish Economy and The European Crisis. June 20124. A clear road map towards a fiscal and financial union A fiscal union A banking union Eurobonds: a convenient mechanism for A single rule book and European supervisor mutualising risk The "blue" and "red" bond proposal A single European Deposit Guarantee Insurance ensures a degree of market discipline System In the mean time, the ESM could be more A single European rescue fund efficient reducing the volatility of risk premia Page 11
  • 12. The Spanish Economy and The European Crisis. June 2012ContentsSection 1International environment: continued global growth and the European CrisisSection 2The Spanish economy at a crossroads Page 12
  • 13. The Spanish Economy and The European Crisis. June 2012Main changes in the economic scenario for 2012 Factors determining the economic scenario Source: BBVA Research Growth forecast in January -1,3% 1. New available information in line with our scenario 2. Higher oil prices New factors 3. Higher financial tensions 4. Fiscal adjustment due to the 2011 deviation from target 5. LEP and Government Commercial Debt Program 6. Labour market reform New scenario -1,3% Page 13
  • 14. The Spanish Economy and The European Crisis. June 2012Available data confirms the scenarioSpain: real GDP growthand forecasts based on MICA-BBVA model (%, qoq) Source: BBVA Research Current forecast: 4 May The Spanish economy entered technical recession 1.5 1.5 in 1Q12... 1.0 1.00.5 0.5 ...albeit with no acceleration in the rate of deterioration versus 4Q110.0 0.0-0.5 -0.5-1.0 -1.0 Published data indicates that 2Q12 growth is likely to have remained negative-1.5 -1.5 1Q11 4Q11 1Q10 4Q10 2Q09 4Q09 3Q09 2Q12 2Q11 1Q12 2Q10 3Q11 3Q10 CI at 60% CI at 40% CI at 20% Employment continues to be hindered by the MICA-BBVA point estimation (21% of data for 2Q12) negative outlook for growth Actual (BBVA Research official forecast for 2Q12) Page 14
  • 15. The Spanish Economy and The European Crisis. June 2012Increased financial tensions Despite the ECB liquidity, the progress being made in Europe, and the reforms in Spain, markets are still cautious due to: The difficulties to reach the 2012 and 2013 deficit targets. The fear that fiscal austerity may lead to a vicious circle The potentially higher cost of bank restructuring as a result of the adjustment in the real estate sector and the slower growth The higher amount of sovereign debt on banks balance sheets: negative interaction between sovereign and banking risks The idea that both Europe and Spain have lacked a medium and long- term strategic plan Page 15
  • 16. The Spanish Economy and The European Crisis. June 2012Fiscal deficit: the challenge for 2012 Unobservable components modelGeneral government: budget balance adjustment results(pp of GDP)Source: BBVA Research based on MINHAP In a no-policy change scenario, the deficit6.0 would increase by 1.9 pp of GDP in 20125.0 3.64.0 2.33.0 Significant cyclical deterioration in 20122.01.0 0.40.0 The discretionary measures needed amount-1.0 to more than 5 pp of GDP to reach the target of -5,3%-2.0-3.0 2011 (Deficit: 8.9%) 2012 (Target: -5.3%) 2013 (Target: -3.0%) Already announced 4.7 pp. Additional asset Cycle-adjusted Cyclical deterioration sales could help reach target if needed Discretionary measures Structural deterioration Total Page 16
  • 17. The Spanish Economy and The European Crisis. June 2012Fiscal deficit: the challenge for 2012General government: measures taken in 2012(pp of GDP)Source: BBVA Research Billions %  G DP Deficit  20 1  (a) 1 -­‐9 1,4 -­‐8,9 Target  20 1 (b) 2   -­‐57,1 -­‐5,3 Difference  (c=b-­‐a) 34,3 3,6 Measures taken so far amount Additional  a djustment  (d) 20 ,7 1,9 4,7 pp of GDP Total  adjustment  (c+d) 55,0 5,1 Measures  a lready  t ak en Central  G ov.:  20 1 B udget 2   25,7 2,4 L ocal  G ov.:  r eal  e state  tax 0 ,9 0 ,1 Central government announced measures Social  s eg.:  T ax  e vasion  r eduction 1,9 0 ,2 equivalent to half of the adjustment L ocal  G ov..:  overlaps  a nd  unowend  powers 0 ,1 0 ,0 Regional  G ov.:  R eestructuring  programs  20 1 2-­‐20 14 18,3 1,7 L ocal  G ov.:  R eestructuring  programs 3,1 0 ,3 Central  G ov.:  e x penditures  c uts 0 ,3 0 ,0 Privatizations, one-offs in 2011 and additional Total  m edidas 50 ,3 4,7 measures could help reach this year’s target Nominal  G DP 1 74,7 .0 Page 17
  • 18. The Spanish Economy and The European Crisis. June 2012 Fiscal deficit: the challenge for 2012 and 2013 General government: budget balance and output gap (pp of GDP) Source: BBVA Research based on MINHAP 4% 2% 06 07 05 0%Budget balance (% GDP) 03 02 04 01 Significant reduction of the structural 99 00 component -2% 14 13 97 98 -4% 92 08 96 If 2013 target is achieved, structural deficit 12 -6% 94 close to 0%. 9593 -8% 11 10 A slow and steady fiscal consolidation -10% needed 09 -12% -6% -4% -2% 0% 2% 4% 6% Output gap Page 18
  • 19. The Spanish Economy and The European Crisis. June 2012The new Fiscal Stability LawEU27: fiscal rules index (2010)Source: BBVA Research based on the European Commission 2,5 2,0 Spain has bee one of the first countries implementing the new Stability Treaty 1,5 1,0 Structural target and better monitoring of 0,5 regional governments0,0-0,5 The new law improve further the fiscal rules-1,0 index -1,5 HU BG BE LU MT DE UK NL DK FR PT SE FI CY CZ EE SK PL IE RO EL AT ES IT SI LV LT UE27 Page 19
  • 20. The Spanish Economy and The European Crisis. June 2012Public debt low but increasing due to high deficits General Government debt (% of GDP)Public debt as percentage of GDPSource: BBVANS source: Research based on Eurostat and CBO160 Greece& Fiscal consolidation needed140 120 Italy& Public debt remains at levels well below the Portugal& European average even for non-EDP debt Ireland&100 France& 80 Germany& Fiscal consolidation earlier than in most of Spain& countries but deviating from target in 2011 60 40 New Stability Law and new measures to 20 reduce the deficit in 2012 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Page 20
  • 21. The Spanish Economy and The European Crisis. June 2012Household debt deleveraging slowlyHouseholds debt(% of GDP) debt (% of GDP) Household source: NS and HaverSource: BBVA Research based on Eurostat140 Improvement of household’s120 Ireland) balance sheet Portugal)100 Spanish households debt similar to US levels. Spain) Slower deleveraging (higher property ratio) USA) 80 Greece) France) 60 Germany) Households increased savings rates and their Italy) holdings of financial assets during the crisis 40 20 A 40% fall in house prices would put wealth position (% GDP) at similar levels as in other 0 developed economies. Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Page 21
  • 22. The Spanish Economy and The European Crisis. June 2012Corporate debt deleveraging: duality across sectorsCorporate debt(% of GDP) Corporate debt (% of GDP)Source: BBVA Research280 Corporate Debt Ireland)240 Large differences across countries200 Spain)160 France) Portugal) Spanish duality: corporate debt concentrated in construction and real estate120 Italy) 80 USA) Greece) Deleveraging will continue in sectors and Germany) firms with large levels of debt 40 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Page 22
  • 23. The Spanish Economy and The European Crisis. June 2012Corporate debt deleveraging: duality across sectorsCorporate credit(% of GDP) Corporate credit (% of GDP)Source: BBVA Research110 Corporate credit100 90 Again large differences across countries 80 Spain) 70 Portugal) Ireland) 60 Italy) Spanish duality: corporate credit in sectors Greece) others than construction similar to France 50 Spain)(nc)) 40 France) Germany) 30 Selective default of firms in high leveraged sectors (as in Ireland?) 20 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Page 23
  • 24. The Spanish Economy and The European Crisis. June 2012Real estate market adjusting to levels before the boomSpain: Real prices in the housing sector(1Q2002=100)Source: BBVA Research based on INE180160 44% Oversupply of unsold homes is around 700K,140 below 3 years of potential demand12010 0 Real prices still have room to go down (12% 20 % 80 more), but it is a very heterogeneous market 60 30 % 40 Open question: an overshooting of prices? 20 0 1972 1973 1974 1975 1977 1978 1979 1982 1983 1984 1985 1987 1988 1989 1992 1993 1994 1995 1997 1998 1999 20 12 20 13 20 14 20 15 20 0 2 20 0 3 20 0 4 20 0 5 20 0 7 20 0 8 20 0 9 1980 1990 20 10 20 0 0 Page 24
  • 25. The Spanish Economy and The European Crisis. June 2012The banking system reform Coverage of problematic and non-problematic real estate portfolio 60% Exposure  €184bn Exposure  €123bn Exposure  €307n 50% 10% 10% 40% 14% 14% 30% 27% 17% 20% 29% 29% 29% 30% 10% 18% 18% 18% 7% 0% Problemático, dic-11 Problemático, feb-12 Problemático, may-12 No problemático, dic- No problemático, feb- No problemático, Total, dic-11 Total, feb-12 Total, may-12 may-12 11 12 Current coverage Additional provisions Capital add-on Page 25
  • 26. The Spanish Economy and The European Crisis. June 2012The banking system reform May 21 Before May 31 June 11 June 21 July 31 Deadline to BdE/MEC press present plans for release new provisions (RDL May-12) Stress test OW + RB(top/down) of the Results Spanish banking (62 bn) system. Four auditing firms appointed to contrast The “outcome estimation will be known” procedures and impairment -> capital needs annotations across the banking system Page 26
  • 27. The Spanish Economy and The European Crisis. June 2012The banking system reform Positive aspects Negative aspectsThe independent valuation of portfolios could The loss of credibility, after several definitive give credibility to the process reformsThe coverage of the real estate portfolio, where High uncertainty over coming months, doubts the bulk of the problems lie, is reinforced on portfolios valuation, no roadmap for creation of ‘bad banks’, difficulties to find investors …. The transfer of repossessed assets to ‘bad Real estate provisions are too severe for good banks’ could be positive for institutions in a banks with non-problematic assets worse situation, if they find investorsSpain needs to import credibility and regain its Non discrimination and no clear road map for own non viable entities Page 27
  • 28. The Spanish Economy and The European Crisis. June 2012 Three Achilles heels: 1. High funding needs Spain: Balance of payments and capital flows Source: BBVA Research and Bank of Spain.2520 It’s liquidity, not solvency1510 The strong adjustment on the Spanish net borrowing will continue in 2012, but … 5 0 -5 … at the same time, maturities-10 are still very large in 2012-15-20 Self-fulfilling prophecy: if financial markets-25 close the situation would be unsustainable 2000 SEP 2001 SEP 2002 SEP 2003 SEP 2004 SEP 2005 SEP 2006 SEP 2007 SEP 2008 SEP 2009 SEP 2010 SEP 2011 SEP 2000 MAR 2001 MAR 2002 MAR 2003 MAR 2004 MAR 2005 MAR 2006 MAR 2007 MAR 2008 MAR 2009 MAR 2010 MAR 2011 MAR 2012 MAR FDI inflow s Rest Eurosystem Current Account Page 28
  • 29. The Spanish Economy and The European Crisis. June 2012Three Achilles heels: 1. High funding needsCurrent account balance. As percentage of GDPSource: BBVA Research and IMF 2 0 Strong adjustment in latest years despite the -­‐2 deficit in energy account -­‐4 -­‐6 Imbalances explained mainly by growth differentials and high investment, rather than -­‐8 loss of competitiveness-­‐10-­‐12 Spanish share on world exports has remained relatively constant (vs. 30% drops in US or UK)-­‐14-­‐16 Average 20 0 8 20 0 9 20 10 20 11 20 12(f) 20 13(f) Firm size duality: large firms are as productive 1 9 9 -­‐ 9 as in US, France or Germany 20 0 7 Spain Greece Portugal EMU Page 29
  • 30. The Spanish Economy and The European Crisis. June 2012Three Achilles heels: 2. High unemployment rate Substantial, well-targeted & integral reformUnemployment ratesSource: BBVA Research, Haver Substantial increase of internal flexibility (hours and wages) Firm-level agreements are prioritized and opt- out processes are facilitated Slight reduction of the severance payment gap between temporal and permanent employees Legal uncertainty is removed, also for old contracts -> internal devaluation Young workers’ learning and training promoted If the reform is well implemented and explained to both firm owners and workers some of the expected job destruction in 2012 could be avoided Page 30
  • 31. The Spanish Economy and The European Crisis. June 2012Three Achilles heels: 2. High unemployment rateSpain: response to labour market reform(% deviation from trend)Source: BBVA Research 18 16 DSGE results of a full implementation 14 of the labor market reform 12 GDP: short-run effect 0.2%10 and long-run effect 4.5% 8 6 4 Employment: short run 4.4% and long run 10%. Lower effects for full-time employment 2 0 -2 Real wages: short run -0.1% and long run 1%. Greater effects for labor income 2012 2014 2018 2013 2015 2016 2019 2020 2021 2017 GDP Employment Page 31
  • 32. The Spanish Economy and The European Crisis. June 2012Three Achilles heels: 2. High unemployment rateSpain: economic growth and breakdown of The challenge: from adjustment to growthdifference in number of hours worked(cumulative change 2007-09, %)Source: BBVA Research based on INE and EC data Short-term goal: prevent further job losses → 2 adjust working hours + wage flexibility and 1 effective organisation 0 -1 Estimulate growth where is scant and take advantage where it prospers-2-3-4 GDP (-3%) Reallocation of productive factors to firms and-5 GDP (-4%) more dynamic sectors (foreign sector)-6-7-8 Eliminate internal growth barriers through a Germany Spain more favorable regulatory environment Employment Average working day in the year Total hours GDP Page 32
  • 33. The Spanish Economy and The European Crisis. June 2012Three Achilles heels: 3. The quest for growth Labor market Implemented a preliminary version and waiting for the final version after parliamentary approval Credible ex ante multiyear measures. Avoid self-defeating austerity Fiscal consolidation Commercial debt of local and regional governments (2.5% of GDP) covered by CG -> fiscal stimulus close to 0,75% of GDP Financial system Put an end to financial markets doubts about the solvency of the banking system to reduce financial costs Competitiveness Next in line. Improve regulation, increase competition and reduce administrative costs. Fiscal devaluation? Energy dependency Reduce energy dependency, green taxes, better regulation, explore all options Education and R&D Most important challenge in the long run. A pact to reduce high school drop-out rates, and to improve vocational training -> R+D Page 33
  • 34. The Spanish Economy and The European Crisis. June 2012AnnexThree Achilles heels: 3. The quest for growthStructural capacity in developed economiesSource: IMF and BBVA Research Liberal Market Economies Coordinated Market Economies Mixed market Economies Avge.Medium Term UK USA IRL GER FRA NLD BEL AUT FIN DEN SWE JAP SPA ITA POR GRELabour market 1 1 1 2 3 2 2 2 1 1 2 1 1 3 3 3 1.9Corporate regulations 1 1 1 2 2 1 3 2 2 1 1 2 3 2 2 3 1.8TIC regulations 1 1 3 1 2 1 1 1 2 1 1 2 1 2 2 3 1.6Retail regulations 1 1 1 1 2 1 3 3 2 2 1 1 2 2 2 3 1.8Professional services reg. 1 1 1 3 2 1 2 2 1 1 1 1 2 3 2 3 1.7Long termInstitutions and contracts 1 2 2 1 2 1 2 1 1 1 2 2 2 3 3 3 1.8Human capital 2 2 1 2 2 1 1 2 1 1 1 1 3 3 3 3 1.8Infraestructure 1 1 3 1 1 1 2 2 2 1 1 1 1 3 2 3 1.6Innovation 1 1 2 1 1 1 1 2 2 1 1 1 3 2 3 3 1.6Average 1.1 1.3 1.7 1.6 1.9 1.1 1.9 1.9 1.6 1.1 1.2 1.3 2 2.6 2.4 3.0 1.7 After the labor market reform, the next objective in the short run should be to improve regulations -> structural capacity at 1.5, that is, better than core EMU countries Page 34
  • 35. The Spanish Economy and The European Crisis. June 2012Conclusions•  2012: another year characterized by risks and challenges, with Europe and Spain falling behind rest of the world on growth.•  The new Stability Pact and the ECBs liquidity measures are positive steps forward but are not enough: a more credible firewall needed.•  The Spanish economy is adjusting quickly. Substantial reforms, as the recent labor market reform, needed to stimulate growth and reduce the unemployment rate.•  Solvency problems are firm specific (real estate sector and few banks) and manageable.•  Public sector debt is not a problem if regional governments deficits are curbed.•  It is all about liquidity: high dependence on financial markets and risks of self-fulfilling prophecies.•  Create a virtuous circle (reduction of imbalances and reforms) to restore credibility and reduce uncertainty: crucial for positive effects of economic policy measures. Page 35
  • 36. The Spanish Economy andThe European CrisisRafael DoménechCFA Spain Academy for Financial JournalistsJune 27, 2012