The spanish economy and the european crisis

36
The Spanish Economy and The European Crisis Rafael Doménech CFA Spain Academy for Financial Journalists June 27, 2012

description

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.

Transcript of The spanish economy and the european crisis

Page 1: The spanish economy and the european crisis

The Spanish Economy and The European Crisis

Rafael Doménech

CFA Spain Academy for Financial Journalists June 27, 2012

Page 2: The spanish economy and the european crisis

The Spanish Economy and The European Crisis. June 2012

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Section 1

International environment: continued global growth and the European Crisis Section 2

The Spanish economy at a crossroads

Contents

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The Spanish Economy and The European Crisis. June 2012

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Europe decoupling from global growth

GDP growth (% yoy) Source: BBVA Research

The debt crisis continues, with Greece under the spotlight and concerns about Spain

High levels of financial stress in Europe, with a risk of credit restrictions

Stability Treaty: towards Maastricht 2.0. More emphasis on growth

Expansive, but no homogeneous, monetary policies by the Fed, the Bank of England and the

ECB

A slow, heterogeneous and vulnerable recovery

3.64.0

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2012 2013 2012 2013 2012 2013 2012 2013

Global EMU USA EAGLES

May-­‐12 Feb-­‐12

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The European crisis continues

Signi!icant progress... ... but still with challenges ahead

To date, the authorities have been a step behind the events à half measures to overcome the crisis

Restructuring of Greek debt and bringing forward the ESM

Long-term ECB liquidity provision

Reforms in Portugal, Spain, and Italy

Approval of the Stability Treaty

1. Access to financial markets

3. Growth agenda

4. A clear road map towards a fiscal union and financial integration

2. Need for e"icient firewalls: Spain financial assistance and others

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BBVA Financial Stress Index Source: Bloomberg and BBVA Research

-1.50

-1.00

-0.50

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USA EMU

The European crisis continues

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1. Access to !inancial markets

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

Interest rates and TARGET2 Source: ECB and BBVA Research

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2. Need for e"icient !irewalls

.

The !inancial assistance to Spain is a positive step …

The EUR 100bn of financial assistance is a su"iciently high backstop, announced before

the results of the stress tests

Removes uncertainty about funding sources and increases the credibility of the restructuring

process

It differentiates Spain from the cases of other peripherals like Greece, Portugal or Ireland

… that should be complemented with additional European measures

Breaking up the correlation between sovereign and banking risk (SMP by ECB, EBA, …)

E"icient use of available resources by the ESM to anchor markets expectations about the euro

and risk premia

Short-run measures consistent with long-run objectives

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What is needed? What is the reallity?

Clear roadmap to completely remove the expectations of an euro break up

A roadmap with a credible strategy for long-term growth

Banking union and direct capital injection from ESM

Meeting fiscal targets to reduce the increase in debt

There are major disagreements between members. A winding road

No news

Backstop + credibility … details still pending

Public debt increases and doubts about preferred status of EFSF/ESM

Rick premium

Exchange rate

Growth

Banking restructuring

Fiscal policy

2. Need for e"icient !irewalls

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3. Growth plan

Clear route map for the future of EMU

Balance between growth and austerity: reforms in exchange for a growth strategy

Short-term objective: to avoid the risk of an austerity-recession vicious circle and the doubts regarding sovereign debt solvency

Gradual fiscal adjustment with multi-year plans. Focus on structural deficits as the Treaty proposes

A growth plan that complements !iscal adjustment

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4. A clear road map towards a !iscal and !inancial union

EFSF & ECB ESM European Treasury Eurobonds

Very short run Short to medium run

Long run

EFSF Governments

ESM Banks

European banking union

Very short run (if ESM not ready)

Short to medium run

Long run

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4. A clear road map towards a !iscal and !inancial union

A !iscal union

Eurobonds: a convenient mechanism for mutualising risk

The "blue" and "red" bond proposal ensures a degree of market discipline

In the mean time, the ESM could be more e"icient reducing the volatility of risk premia

A banking union

A single rule book and European supervisor

A single European Deposit Guarantee Insurance System

A single European rescue fund

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Section 1

International environment: continued global growth and the European Crisis

Section 2

The Spanish economy at a crossroads

Contents

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Main changes in the economic scenario for 2012

Factors determining the economic scenario Source: BBVA Research

New

fact

ors

Growth forecast in January

New scenario -1,3%

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

-1,3%

1. New available information in line with our scenario

2. Higher oil prices

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Available data con!irms the scenario

Spain: real GDP growth and forecasts based on MICA-BBVA model (%, qoq)

Source: BBVA Research Current forecast: 4 May

The Spanish economy entered technical recession in 1Q12...

Employment continues to be hindered by the negative outlook for growth

Published data indicates that 2Q12 growth is likely to have remained negative

...albeit with no acceleration in the rate of deterioration versus 4Q11

CI at 60% CI at 40% CI at 20%

MICA-BBVA point estimation (21% of data for 2Q12)

Actual (BBVA Research o"icial forecast for 2Q12)

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Increased !inancial tensions

The di"iculties 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 idea that both Europe and Spain have lacked a medium and long-term strategic plan

The higher amount of sovereign debt on banks' balance sheets: negative interaction between sovereign and banking risks

Despite the ECB liquidity, the progress being made in Europe, and the reforms in Spain, markets are still cautious due to:

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General government: budget balance adjustment (pp of GDP) Source: BBVA Research based on MINHAP

In a no-policy change scenario, the deficit would increase by 1.9 pp of GDP in 2012

Significant cyclical deterioration in 2012

The discretionary measures needed amount to more than 5 pp of GDP to reach the target

of -5,3%

Already announced 4.7 pp. Additional asset sales could help reach target if needed

Fiscal de!icit: the challenge for 2012

Unobservable components model results

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Cycle-adjusted Cyclical deterioration

Discretionary measures Structural deterioration Total

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General government: measures taken in 2012 (pp of GDP) Source: BBVA Research

Fiscal de!icit: the challenge for 2012

Measures taken so far amount 4,7 pp of GDP

Central government announced measures equivalent to half of the adjustment

Privatizations, one-offs in 2011 and additional measures could help reach this year’s target

Billions %  GDPDeficit  2011  (a) -­‐91,4 -­‐8,9Target  2012  (b) -­‐57,1 -­‐5,3

Difference  (c=b-­‐a) 34,3 3,6Additional  adjustment  (d) 20,7 1,9Total  adjustment  (c+d) 55,0 5,1Measures  already  takenCentral  Gov.:  2012  Budget 25,7 2,4Local  Gov.:  real  estate  tax 0,9 0,1Social  seg.:  Tax  evasion  reduction 1,9 0,2Local  Gov..:  overlaps  and  unowend  powers 0,1 0,0Regional  Gov.:  Reestructuring  programs  2012-­‐2014 18,3 1,7Local  Gov.:  Reestructuring  programs 3,1 0,3Central  Gov.:  expenditures  cuts 0 ,3 0,0

Total  medidas 50 ,3 4,7

Nominal  GDP 1.074,7

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Significant reduction of the structural component

If 2013 target is achieved, structural deficit close to 0%.

A slow and steady fiscal consolidation needed

Fiscal de!icit: the challenge for 2012 and 2013

General government: budget balance and output gap (pp of GDP) Source: BBVA Research based on MINHAP

92

93 94 95

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et b

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ce (%

GD

P)

Output gap

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The new Fiscal Stability Law

EU27: fiscal rules index (2010) Source: BBVA Research based on the European Commission

Spain has bee one of the first countries implementing the new Stability Treaty

Structural target and better monitoring of regional governments

The new law improve further the fiscal rules index

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General Government debt (% of GDP) source: NS

Spain&

Portugal&

Greece&

Italy&

Ireland&

France&Germany&

Public debt as percentage of GDP Source: BBVA Research based on Eurostat and CBO

Public debt low but increasing due to high de!icits

Public debt remains at levels well below the European average even for non-EDP debt

Fiscal consolidation earlier than in most of countries but deviating from target in 2011

New Stability Law and new measures to reduce the deficit in 2012

Fiscal consolidation needed

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Household debt deleveraging slowly

Spanish households debt similar to US levels. Slower deleveraging (higher property ratio)

Households increased savings rates and their holdings of financial assets during the crisis

A 40% fall in house prices would put wealth position (% GDP) at similar levels as in other

developed economies.

Improvement of household’s balance sheet

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Household debt (% of GDP) source: NS and Haver

Portugal)

Greece)

Italy)

Ireland)

France)Germany)

Spain)USA)

Households debt (% of GDP) Source: BBVA Research based on Eurostat

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Corporate debt (% of GDP)

Portugal)

Greece)

Italy)

Ireland)

France)

Germany)

Spain)

USA)

Large differences across countries

Spanish duality: corporate debt concentrated in construction and real estate

Deleveraging will continue in sectors and firms with large levels of debt

Corporate Debt

Corporate debt deleveraging: duality across sectors

Corporate debt (% of GDP) Source: BBVA Research

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Corporate credit (% of GDP)

Portugal)

Italy)Ireland)

France)

Germany)

Spain)

Greece)Spain)(nc))

Again large differences across countries

Spanish duality: corporate credit in sectors others than construction similar to France

Selective default of firms in high leveraged sectors (as in Ireland?)

Corporate credit

Corporate debt deleveraging: duality across sectors

Corporate credit (% of GDP) Source: BBVA Research

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Spain: Real prices in the housing sector (1Q2002=100) Source: BBVA Research based on INE

Real estate market adjusting to levels before the boom

Oversupply of unsold homes is around 700K, below 3 years of potential demand

Real prices still have room to go down (12% more), but it is a very heterogeneous market

Open question: an overshooting of prices?

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30 %

20 %

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29% 29% 29%

18% 18% 18%

14% 14%

7%

30%

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27%

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0%

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ay-12

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ay-12

Total, dic-11

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Total, may-12

Current coverage Additional provisions Capital add-on

Exposure  €184bn Exposure  €123bn Exposure  €307n

The banking system reform Coverage of problematic and non-problematic real estate portfolio

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The banking system reform

May 21 June 11

Stress test (top/down) of the Spanish banking

system.

Deadline to present plans for

new provisions (RDL May-12)

June 21

OW + RB Results (62 bn)

July 31 Before May 31

Four auditing firms appointed

to contrast estimation

procedures and impairment annotations across the

banking system

BdE/MEC press release

The “outcome will be known”

-> capital needs

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The banking system reform

Positive aspects

The independent valuation of portfolios could give credibility to the process

The coverage of the real estate portfolio, where the bulk of the problems lie, is reinforced

The transfer of repossessed assets to ‘bad banks’ could be positive for institutions in a

worse situation, if they find investors

Negative aspects

The loss of credibility, after several definitive reforms

High uncertainty over coming months, doubts on portfolios valuation, no roadmap for creation

of ‘bad banks’, di"iculties to find investors ….

Real estate provisions are too severe for good banks with non-problematic assets

Spain needs to import credibility and regain its own

Non discrimination and no clear road map for non viable entities

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Three Achilles' heels: 1. High funding needs

Spain: Balance of payments and capital flows Source: BBVA Research and Bank of Spain.

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FDI inflow s Rest Eurosystem Current Account

The strong adjustment on the Spanish net borrowing will continue in 2012, but …

… at the same time, maturities are still very large in 2012

Self-fulfilling prophecy: if financial markets close the situation would be unsustainable

It’s liquidity, not solvency

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Current account balance. As percentage of GDP Source: BBVA Research and IMF

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0

2

Average1999-­‐2007

2008 2009 2010 2011 2012(f) 2013(f)

Spain Greece Portugal EMU

Three Achilles' heels: 1. High funding needs

Strong adjustment in latest years despite the deficit in energy account

Imbalances explained mainly by growth differentials and high investment, rather than

loss of competitiveness

Spanish share on world exports has remained relatively constant (vs. 30% drops in US or UK)

Firm size duality: large firms are as productive as in US, France or Germany

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Substantial, well-targeted & integral reform

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

Three Achilles' heels: 2. High unemployment rate

Unemployment rates Source: 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

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Three Achilles' heels: 2. High unemployment rate

GDP: short-run effect 0.2% and long-run effect 4.5%

Employment: short run 4.4% and long run 10%. Lower effects for full-time employment

Real wages: short run -0.1% and long run 1%. Greater effects for labor income

DSGE results of a full implementation of the labor market reform

Spain: response to labour market reform (% deviation from trend) Source: BBVA Research

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Three Achilles' heels: 2. High unemployment rate

The challenge: from adjustment to growth Spain: economic growth and breakdown of difference 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 →

adjust working hours + wage flexibility and effective organisation

Estimulate growth where is scant and take advantage where it prospers

Reallocation of productive factors to firms and more dynamic sectors (foreign sector)

Eliminate internal growth barriers through a more favorable regulatory environment

GDP (-4%)

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Employment Average working day in the year Total hours GDP

Germany Spain

GDP (-3%)

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Labor market

Fiscal consolidation

Financial system

Competitiveness

Energy dependency

Education and R&D

Three Achilles' heels: 3. The quest for growth

Implemented a preliminary version and waiting for the final version after parliamentary approval

Credible ex ante multiyear measures. Avoid self-defeating austerity Commercial debt of local and regional governments (2.5% of GDP)

covered by CG -> fiscal stimulus close to 0,75% of GDP

Put an end to financial markets doubts about the solvency of the banking system to reduce financial costs

Next in line. Improve regulation, increase competition and reduce administrative costs. Fiscal devaluation?

Reduce energy dependency, green taxes, better regulation, explore all options

Most important challenge in the long run. A pact to reduce high school drop-out rates, and to improve vocational training -> R+D

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Structural capacity in developed economies Source: 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 GRE Labour market 1 1 1 2 3 2 2 2 1 1 2 1 1 3 3 3 1.9 Corporate regulations 1 1 1 2 2 1 3 2 2 1 1 2 3 2 2 3 1.8 TIC regulations 1 1 3 1 2 1 1 1 2 1 1 2 1 2 2 3 1.6 Retail regulations 1 1 1 1 2 1 3 3 2 2 1 1 2 2 2 3 1.8 Professional services reg. 1 1 1 3 2 1 2 2 1 1 1 1 2 3 2 3 1.7

Long term Institutions and contracts 1 2 2 1 2 1 2 1 1 1 2 2 2 3 3 3 1.8 Human capital 2 2 1 2 2 1 1 2 1 1 1 1 3 3 3 3 1.8 Infraestructure 1 1 3 1 1 1 2 2 2 1 1 1 1 3 2 3 1.6 Innovation 1 1 2 1 1 1 1 2 2 1 1 1 3 2 3 3 1.6

Average 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

Annex Three Achilles' heels: 3. The quest for growth

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

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Conclusions •  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 ECB's 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 !irm speci!ic (real estate sector and few banks) and manageable.

•  Public sector debt is not a problem if regional governments de!icits are curbed.

•  It is all about liquidity: high dependence on !inancial markets and risks of self-ful!illing 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 36: The spanish economy and the european crisis

The Spanish Economy and The European Crisis

Rafael Doménech

CFA Spain Academy for Financial Journalists June 27, 2012