Spain
Recent Economic Developments

This paper describes economic developments in Spain during the 1990s. Spain emerged from a recession in 1994, as real GDP increased by 2 percent, following a decline of 1.1 percent in 1993. The recovery was triggered by a surge in exports that started in mid-1993, in turn spurred by the sharp depreciation of the peseta in 1992–93, and the incipient recovery of domestic demand in other European countries. Private consumption picked up in early 1994 but provided only a moderate contribution to the turnaround.

Abstract

This paper describes economic developments in Spain during the 1990s. Spain emerged from a recession in 1994, as real GDP increased by 2 percent, following a decline of 1.1 percent in 1993. The recovery was triggered by a surge in exports that started in mid-1993, in turn spurred by the sharp depreciation of the peseta in 1992–93, and the incipient recovery of domestic demand in other European countries. Private consumption picked up in early 1994 but provided only a moderate contribution to the turnaround.

I. Domestic Economy

1. Overview

Spain emerged from a recession in 1994, as real GDP increased by 2 percent, following a decline of 1.1 percent in 1993 (Tables 1-3). The recovery was triggered by a surge in exports that started in mid-1993, in turn spurred by the sharp depreciation of the peseta in 1992-93 and the incipient recovery of domestic demand in other European countries. Private consumption picked up in early 1994 but provided only a moderate contribution to the turnaround. The recovery was consolidated in 1995 by the continuation of the growth in exports and bolstered by an upturn in private investment. However, toward the end of 1995 the growth rate slowed somewhat; year-on-year GDP growth in the first half of 1995 averaged 3.1 percent, but fell to 2.7 percent in the second half. For the year as a whole the increase in GDP was 3.0 percent.

Table 1.

Spain: Demand and Output, 1990-94

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Source: Ministry of Economy and Finance.

Changes at constant prices in stockbuilding are expressed in percent of real GDP in the previous period.

Table 2

Spain: Quarterly Evolution of GDP, 1993-95

(Year-on-year percentage change at constant prices)

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Source: Ministry of Economy and Finance.

Changes at constant prices in stockbuilding are expressed in percent of real GDP in the previous period.

Table 3.

Spain: Contribution to the Growth of Real Aggregate Demand, 1990-94

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Sources: Ministry of Economy and Finance; and staff estimates.

Consumer price inflation averaged just over 4½ percent a year in 1993-95, as against over 6 percent a year in the preceding three years. Underlying inflation, which excludes energy and nonprepared food, declined steadily in 1993-94; both indicators jumped temporarily in early 1995 following the implementation of a 1 percentage point increase in the VAT, before resuming their downward trend. year-on-year CPl growth declined to 3.7 percent by February 1996; while underlying inflation stood at 4.1 percent. The lowering of inflation, despite the significant effective exchange rate depreciation that occurred in 1992-93 and the recovery of the economy in 1994-95, reflected the slowdown of wage increases since 1994 and, more generally, the effects of a tight monetary policy.

The turnaround in the economy was felt in the labor market with a lag. Overall employment continued to decline in early 1994 after falling very sharply in 1993. Although net increases in employment started in the second quarter, average employment dropped 0.9 percent in 1994, before increasing some 2½ percent in 1995. The unemployment rate peaked at over 24 percent in 1994 before declining to 22.9 percent in late 1995.

2. Demand and expenditure developments since 1993

a. Exports

Helped by the boost to competitiveness from the cumulative 20 percent effective depreciation of the peseta in 1992-93, exports increased 8.3 percent in 1993, with the external sector contributing almost 3 percentage points to GDP growth. The export upsurge strengthened further in 1994 as the increase in partner country demand coupled with the improvement in Spanish external competitiveness permitted export growth rates to almost double. Although the rate of expansion of exports slowed in 1995, year-on-year volume growth still exceeded 10 percent at the end of the year. The sustained growth in exports reflected not only increases in exports of goods, but also a significant growth in tourism.

b. Private consumption

Real private consumption, after a fall of 2 percent in 1993, increased by only 0.8 percent in 1994 and 1.8 percent in 1995. The fall in 1993 can be attributed largely to the impact of rising unemployment on household income, as veil as to high interest rates. The wage bill increased only 2.2 percent in 1993 from 7.3 percent in 1992, although real wages still increased due to collective agreements made in previous years (Tables 4 and 5). The decline in wage income was only partially offset by increases in social security transfers and lower direct taxes resulting from a reform in the personal income tax (approved in 1991); real household disposable income rose only 1.6 percent. At the same time, the personal saving rate increased significantly in 1993, reflecting high interest rates and—perhaps—expectations of wage moderation in coming years.

Households dissaved in 1994 contributing to a modest increase in consumption despite a decline in real household income (the fall in the saving rate appears to have reflected not only lover interest rates, but also households’ desire to smooth consumption in view of the improvement in prospects suggested by the pickup in economic activity). Among the factors contributing to the decline in household income were the reduction in government social benefit outlays resulting from the 1992-94 unemployment system reform, wage moderation and a weakening in investment income (dictated in part by the fall in interest rates initiated in the second half of 1993).

Table 4.

Spain: Factors Accounting for Growth in Private Consumption, 1990-94 1/

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Source: Staff calculations on Ministry of Economy and Finance data.

Income includes those of households and unincorporated business.

Direct taxes plus social security contributions minus transfers received.

Table 5.

Spain: Household Disposable Income, 1990-94

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Source: Ministry of Economy and Finance.

Gross savings in percent of disposable income.

As in several other European countries, consumption growth was subdued for most of 1995. This vas foreshadowed by the stagnation of the consumer confidence index in late 1994 at a level 10-15 percentage points below those recorded in 1990-91 (the index showed nevertheless a sustained improvement in the year). The forward-looking components of the index turned down quite significantly in late 1994, and the overall index started to fall in early 1995.

c. Gross fixed investment

Investment was strongly affected by the recession, declining sharply in 1993, bottoming out in the fourth quarter. Although the fall in investment was strongly influenced by the weakening of external demand in 1992 and the contraction in domestic demand in 1993, a decrease in firms’ profitability also played a significant role.

Investment picked up in the second half of 1994, as residential investment recovered, helped by the fall in long-term real interest and mortgage rates in 1993-94. Nevertheless, investment for the year as a whole increased only marginally, in part because investment in machinery had dropped very sharply in 1993 and recovered less rapidly in 1994. Public investment held more or less steady in 1993-94.

The sustained growth in exports in 1993-94, the increase in capacity utilization and a significant improvement in profitability in 1994-95 contributed to the recovery of investment in the last two years. Capacity utilization recovered by 10 percentage points while, according to surveys published by the Bank of Spain, operational margins in the manufacturing sector increased 80 percent in 1994, after being compressed by 18 percent in the previous year. Also the average before-tax income in the business sector increased by 30 percent in 1994. Gross investment continued to accelerate in the first three quarters of 1995, rising by over 10 percent (annual rate) in the period. Even so, overall investment in late 1995 still remained below its 1992 level. The new investment in manufacturing has largely been targeted at increasing productivity rather than expanding capacity, in contrast to the previous cycle.

d. Stockbuilding

After a sharp inventory adjustment in 1993, the acceleration of domestic and foreign demand, together with lower short-term interest rates, induced a recovery in inventory investment during 1994. Stockbuilding slowed down following the tightening of monetary policy in early 1995, contributing only modestly to GDP growth in that year.

e. Imports

After declining by 5 percent in 1993, imports of goods and nonfactor services rebounded strongly in 1994 and 1995. The recovery was concentrated mainly in imports of intermediate goods and equipment, while imports of consumption goods remained moderate. The recovery in imports reduced the contribution of the external sector to GDP significantly in 1994, turning it negative in 1995.

f. Saving-investment balance

The decline in investment in 1993 was substantially larger than that of saving, leading to a sharp reduction in the external current account deficit. Government investment remained relatively stable at around 4 percent of GDP, but private investment dropped from 19.2 percent of GDP in 1992 to 15.7 percent in 1993, before recovering to 16.2 percent of GDP in 1994 and 17.5 percent of GDP in 1995. On the savings side, the decline in enterprise saving in 1993 was more than offset by a significant increase in household saving. However, the emergence of a substantial public sector current deficit led to a slight overall reduction in national saving that year. National savings fell again in 1994, despite a 1/2 percentage point of GDP improvement in government saving and the increase in firms’ profitability, as household saving weakened. These trends were reflected in a marginal deterioration of the current account balance of payments after the sharp improvement the previous year. Preliminary estimates for 1995 suggest a strong improvement in the external current account to a surplus of 1/2 percentage point of GDP. This reflected the strengthened financial situation of firms, which offset a decline in household saving, and a further strengthening in the government accounts, helped in part by a bunching of transfers from the European Union.

g. The composition of output

Output in the agricultural and fishing sector declined in 1991 and 1992 (Table 6), recovered slightly in 1993 but fell sharply in 1994 and 1995 mainly as a result of adverse weather conditions and the effects of the Common Agricultural Policy (CAP). A drought and a switch in the calculation of agricultural subsidies in the European Union (from a policy based mainly on minimum prices toward one making transfers proportional to farm’s sizes) were reflected in declines of 4 percent and 10.5 percent, respectively, in the sector’s output in 1994 and 1995. Disputes on fishing rights with certain countries (e.g., Canada and Morocco) also had negative repercussions in the fishing sector in 1994-95.

Table 6.

Spain: GDP by Sectors, 1990-94

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Sources: INE. and Ministry of Economy and Finance.

Output in the manufacturing sector declined by a cumulative 4.4 percent during 1992 and 1993, but recovered by 3.5 percent in 1994 led by the strong growth in exports (Table 7). Industrial production, which had declined by a cumulative 9 percent during 1990-93, increased by 7.3 percent in 1994 with all sectors growing strongly. In 1995, manufacturing production rose by only 4.7 percent, exhibiting a pronounced slowing trend in the course of the year and ending with a year-on-year decline of 0.5 percent in the fourth quarter. Automobile production accounted for a substantial part of the increase in industrial production in 1994. However, a special cash incentive program for new car sales, which started in April 1994 and helped to boost sales by 21 percent that year, was discontinued in June 1995, leading to a 7 percent decrease in car sales in 1995.

Table 7.

Spain: Production Indicators, 1990-95

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Sources: Bank of Spain, Statistical Bulletin; Ministry of Economy and Finance, Sinteais Mensual de Indicadores Economicos.

Corrected for unequal number of working days in the month.

Industrial sector excluding construction.

The construction sector was among the sectors hardest hit by the recession, with output declining by 10 percent in 1992-93. This sector has not yet recovered fully, despite the 19 percent increase in housing starts in 1994 and an additional 30 percent increase in the first half of 1995. The recovery in housing construction was partly offset by lower public investment in road construction and infrastructure.

Value added in the service sector continued to increase throughout the past few years, although the growth rate slowed to only 1/2 percent in 1993, from over 3 percent a year in the preceding three years. Value added accelerated to over 2 percent in 1994 and 1995 despite the fiscal consolidation, with output of nonmarket services increasing noticeably less than market services.

3. Prices

The rate of consumer price inflation, measured in terms of period averages, dropped from almost 6 percent a year in 1991-92 to 4.6 percent in 1993, and continued at a similar rate in 1994 and 1995. The declining trend in consumer price inflation was interrupted in early 1995 by a temporary upsurge resulting from increases in indirect taxes and the effects of drought conditions. However, the downward trend resumed by midyear, and by February 1996, as the effect of the increase of the VAT rate disappeared, the annual rate of change in consumer prices had fallen to 3.7 percent, the lowest year-on-year increase of the past two decades. The GDP deflator declined to 4.0-4.5 percent a year in 1993-95, from around 7 percent a year in the three preceding years (Table 8). This slowdown occurred despite the devaluation of the peseta in 1992-93 and a marked escalation in international prices of intermediate goods in 1994. The pass-through of the 1992-93 devaluations contributed to about half of the increase in the final demand deflator in 1994, but its effect was negligible in 1995 despite the fluctuations of the peseta in the early part of the year.

Table 8.
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Source: Bank of Spain, Statistical Bulletin.

Underlying inflation is measured by excluding energy and the unprocessed food groups from the total CPI.

Reflecting the relatively weak growth in private consumption, price increases of nonfood products showed a decelerating trend during most of 1993-95, except for the temporary effects of the 1 percent increase in the VAT in early 1995. Food prices, however, were relatively volatile during this period due to fluctuations in weather conditions and the effects of the CAP, which led to an increase in support prices in Spain in late 1993 reflecting the devaluation of the peseta and the decision to raise the minimum prices of Spanish agricultural products (expressed in ECUs) to levels close to those prevailing in other EU countries. In addition, drought conditions put upward pressure on food prices during most of 1994 and early 1995, but with abundant rains food prices decelerated significantly in the second half of 1995 and early 1996.

Although increases in excise duties and the devaluation of the peseta contributed to a relatively high increase in oil prices in 1993, their effect was moderated by a fall in international oil prices. Energy prices have also reflected the below-inflation increases in electricity rates in the more recent past.

Industrial prices, which had risen very modestly during the recession and immediately preceding years, grew more rapidly in 1994 and 1995, rising by about 5 percent a year. This acceleration appears to reflect an increase in profit margins at the end of the recession in addition to the effect of increases in the price of intermediate goods in 1994-95. With the modest slowdown in activity in the second half of 1995, the year-on-year rate of increase in industrial prices slackened to 4.4 percent by the last quarter of 1995.

4. Labor market

a. Recent developments in employment, unemployment, and wages

The economic recovery in 1994-95 affected the labor market with a lag: overall employment continued to decline in 1994, bringing the cumulative decline since 1990 to almost 850,000 workers or close to 7 percent. In 1995, however, employment creation was strong with 312,000 new jobs produced, an increase of some 2½ percent over 1994 (Table 9). This turnaround reflected the effects of the strong growth in activity for the second year in succession, as Well as the effects of the labor market reforms undertaken in 1993 and 1994. The statistics also reflect the effects of a revision in data collection procedures by the National Statistics Institute (INE), which may account for nearly one third of the “new” employment reported. 1/ Labor force growth remained fairly steady (about 1 percent a year), with the participation rate virtually unchanged. The combination of strong job creation with weak labor force growth resulted in a reduction in the unemployment rate, which dropped from an average 24.2 percent in 1994 to 22.9 percent in late 1995. This fall in unemployment was concentrated in the first half of 1995, as job creation moderated in the third and fourth quarters while labor force participation tended to accelerate from the low levels reached during the 1992-93 recession.

Table 9.

Spain: Population and Unemployment, 1990-95 1/

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Source INE, Labor Force Survey.

Annual averages.

Data for January-October.

Table 10.

Spain: Contribution to Total Employment Growth by Sectors and Categories, 1990-95

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Sources: Minister of Labor and Social Security; and Bank of Spain, Statistical Bulletin.

In 1995, job growth was concentrated in the construction and services sectors, particularly in areas related to the tourism industry (Tables 11 and 12). Employment in the industrial sector, which had declined by 17 percent during the period 1991-94, remained stagnant, despite strong output growth in the sector, reflecting continued industrial restructuring. Agricultural employment continued its long-term decline, falling to only 8.9 percent of the labor force by year-end, a trend undoubtedly exacerbated by the continuation of drought conditions in much of Spain.

Table 11.

Spain: Employment by Sectors, 1990-95

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Sources: Ministry of Labor and Social Security; and Bank of Spain, Statistical Bulletin.
Table 12.

Spain Indicators of Labor Costs, 1990-95

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Sources: Bank of Spain, Statistical Bulletin; and Ministry of Economy and Finance.

Percentage change from the immediately preceding quarter.

Based on collective wage agreements.

Excluding social security contributions; data from the wage survey by INB, excluding agriculture.

Deflated by the private consumption deflator.

National accounts definitions.

Data on employment are those from the Encuesta de Publacion Activa (EPA).

Including construction.

After three years of increases averaging close to 8 percent a year, wage increases declined to 5½ percent in 1993, and to less than 4 percent a year in 1994 and most of 1995. Wage settlements in collective bargaining agreements averaged 3.9 percent through the third quarter of 1995, as against 3.6 percent in 1994. For the economy as a whole, wages fell slightly in real terms in 1994 and further in 1995, after more than a decade of upward movement, while unit labor costs, which had risen very strongly in the beginning of the decade, were virtually unchanged in 1994, and rose by only a small amount, if at all, in 1995 (Table 12). 2/

Among the jobless, the share of the long-term unemployed continued to rise in 1995, after falling in 1992-93 as a result of the influx of newly unemployed during the recession. Those unemployed for more than one year comprised 57 percent of all unemployed in 1995, compared with 56 percent in 1994 and 49 percent in 1993. Unemployment rates continue to be highest among youth, although the rates declined somewhat during 1995, falling from 45.1 percent to 42.5 percent for the 16-24 age group. Job creation affected men and women roughly equally, although the unemployment rate for women fell less quickly due to the increase in the female labor participation rate.

Unemployment varied sharply by regions: the unemployment rate fell sharply in low unemployment regions like the Balearic Islands, Asturias, and Navarra, with more modest falls in the high unemployment areas of Andalucia and Extremadura.

b. The effects of the labor reforms

During 1995, the labor market began to feel the full effects of the reforms undertaken in 1993 and 1994. These reforms made significant changes in four areas: hiring and firing, workplace flexibility, collective bargaining, and unemployment benefits. 1/ Hiring was facilitated by the authorization of private nonprofit employment agencies, by the legalization of temporary employment firms, and by the introduction of new apprenticeship contracts. Some steps, albeit minor ones, were also taken to make dismissals less costly by simplifying dismissal procedures and expanding the acceptable reasons for less costly “justified” redundancies. In the area of workplace flexibility, functional mobility was enhanced by the replacement of the antiquated Ordenanzas Laborales with collective bargaining arrangements on workplace practices and geographic mobility made somewhat easier. Measures were also introduced to encourage part-time employment. Collective bargaining agreements were given a more prominent role in determining wages and working conditions, with restrictions placed on the legal application of contract provisions beyond their specified life as well as regulations to allow bargaining to become more decentralized. Finally, eligibility for unemployment benefits was tightened and benefits were reduced in both generosity and duration. The only new initiative undertaken in the labor market in 1995 was the reduction of 1 percentage point in social contribution rates, compensated by a one point increase in the VAT rate.

During 1995, 25 employment agencies began operation, ending the monopoly of the National Employment Institute (INEM) on job placements. The Ministry of Labor reported that an additional 27 agencies had been approved and would start operations in 1996. Although official figures are unavailable, temporary employment services have also become fairly widespread. The last of the Ordenanzas Laborales were slated for elimination on December 31, 1995, with binding arbitration imposed on those sectors where collective agreements on their replacement had still not been reached.

The reforms in unemployment benefits have produced a significant reduction in outlays by INEM. After a sharp rise in benefit payments during the recession, spending fell by 14 percent in 1994 and by more than 15 percent in the first 11 months of 1995—savings well in excess of the changes in unemployment. These savings reflected both reductions in the average benefit level and in the proportion of unemployed receiving benefits. While not all of the decline is attributable to the labor market reforms, they have clearly played an important part. 1/

The evidence on simplifications in dismissal costs is distinctly less clearcut. While procedures have been simplified, the average severance payment for dismissals with previous trade union agreement declined by only 3 percent between 1993 and the first 9 months of 1995, while dismissals processed by the social tribunals rose by 6 percent. 2/ There is also some evidence of an increasing recourse to the Judicial process, with the number of workers whose cases were decided by tribunals up by 14 percent in the first 9 months of 1995, while those whose individual dismissal has been agreed fell by 12 percent.

The modifications in modes of contracting—the introduction of apprenticeship contracts and measures to encourage part-time employment—have played an important role in the recent evolution of employment and the moderation of wages. Although permanent full-time employment increased for the first time in nearly a decade during 1995, rising by 75,000 workers; more flexible terms of employment applied to the vast bulk of new contracts. Part-time employment grew by nearly 11 percent in 1994, and by an additional 15 percent in 1995, the first full year of the reforms. Part-time employment averaged 640,000 for 1995 as a whole, while 209,000 apprenticeship contracts were initiated in 1994, and another 150,000 more signed in the first 10 months of 1995.

The incentives for greater flexibility and greater responsibility in collective bargaining may have played a role in the moderation of wages, although it is difficult to quantify this effect. The level of conflict in collective bargaining has also declined noticeably, with days lost to industrial action falling by 36 percent in 1994 and remaining roughly constant in 1995. The level of strike action is usually highly cyclical. Thus, strike days declined by 54 percent during the recession years of 1992 and 1993. The further drop in 1994-95 is particularly striking since it came on top of reductions during the recession.

II. Public Sector

1. Performance of the general government 1/

After widening steadily to 7.5 percent of GDP in 1993, the budget deficit of the general government narrowed to 6.7 percent of GDP in 1994, and preliminary data indicate a further reduction to roughly 5.9 percent of GDP in 1995 (Table 13). The decline in the deficit in 1994 and 1995 was consistent with the revised convergence program released by the authorities in July 1994, which called for a progressive reduction of the deficit to attain the 3 percent Maastricht target by 1997.

Table 13.

Spain: General Government - Overall Balances, 1990-95 1/

(In percent of GDP)

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Sources: Bank of Spain, Cuentas Financier as: Ministry of Economy and Finance; and staff estimates.

Deficit (-); national accounts basis.

Estimates are from the Ministry of Economy and Finance.

Includes the State and Central government autonomous organizations.

Regional and local governments.

Includes INEM.

The deficit increase in the early 1990s had been largely the result of the short but sharp recession, which increased the cyclical deficit by about 3 percent of GDP between 1992 and 1993. However, the structural balance also deteriorated in 1993 as a result of the large increase in the burden of interest payments on the growing debt. The deficit reduction achieved in 1994 was structural in nature—weak economic growth meant that the cyclical deficit actually worsened—while in 1995 the cyclical recovery of the economy accounted for most of the deficit reduction. Nevertheless, due to a temporary pause in the growth of interest payments as a share of GDP in 1995, there was a significant improvement in the primary balance. The following table presents estimates of the cyclical and structural deficits for recent years.

Spain: Breakdown of the General Government Deficit

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Sources: Ministry of Economy and Finance; and staff estimates.

Both revenues and expenditures declined as a share of GDP during 1994 and 1995 (Table 14). On the revenue side, tax collections fell in 1994 as a result of the slump in consumption and income tax revenues in the recession. An expected rebound in these revenues did not materialize in 1995, as consumption growth remained moderate, while the bulk of new employment was confined to part-time work and apprenticeship schemes which generated little personal income tax revenues or social security contributions. On the expenditure side, spending was cut sharply on current transfers, largely due to improved performance by the social security system (particularly unemployment benefits). Public consumption and subsidies were also cut significantly, while investment spending fell in both 1994 and 1995 as a share of GDP.

Table 14.

Spain: General Government Nonfinancial Operations, 1990-95 1/

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Sources: Bank of Spain, Ministry of Economy and Finance, and staff estimates.

National accounts basis.

The financial liabilities of the general government have increased rapidly in recent years (Tables 15 and 16). The gross debt stock (on a national accounts basis), rose from 55 percent of GDP to 66 percent between 1992 and 1993, with an additional rise to 70 percent in 1994. Using Maastricht criteria definitions, the net debt of Spain also rose above the 60 percent threshold in 1993, with the debt reaching 60.4 percent of GDP and climbing further to 63 percent in 1994.

Table 15.

Spain: General Government Financing, 1988-1994

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Source: Bank of Spain, Cuentas Financieras.

Includes changes in cash and deposit balance.

Table 16.

Spain: General Government Financing by Debt Holder, 1988-1994 1/

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Source: Bank of Spain, Cuentas Financieres.

Not computed according to Maastricht definition.

The large increase in indebtedness in 1993 was due in part to the issue of additional debt to cover a change in the relations between the Treasury and the Bank of Spain which took effect at the beginning of 1994. The new system (imposed by the European Union Treaty) prohibited government recourse to central bank financing of the deficit—even temporary financing within a given fiscal year. This change made it necessary for the government to build up a substantial cushion of deposits at the Bank of Spain to eliminate the need for temporary loans. As can be seen in Table 15, this resulted in a buildup of nearly Ptas 2.3 trillion in government deposits at the central bank, of which Ptas 1.3 trillion were drawn down in 1994, reducing substantially the net financing needed in that year. These debt dynamics also explain the sharp jump in interest costs to the government in 1993, followed by relative stability in 1994 and 1995.

The increase of debt in 1993 was primarily long-term in nature and constituted a significant shift in the maturity profile of government debt compared with the period of 1988-1990, when most debt was short term. Since 1990, there has also been a notable increase in the debt held by nonresidents. In fact, most of the “extra” indebtedness incurred by the government in 1993 was to nonresidents in pesetas, despite the exchange rate turmoil in late 1992 and early 1993. In 1994, in contrast, foreign debt holdings dropped by 5 points of GDP, with peseta-denominated debt held by foreigners falling even more steeply as investors responded to falling peseta interest rates early in the year and to some weakening of the peseta at the end of 1994 (which culminated in the devaluation of March 1995).

Financing and debt data available for 1995 for the State (Table 21) show a sharp reduction in financing operations, reflecting negative net lending by the central government (Table 17) and a further reduction in deposits at the Bank of Spain. As in 1993 and 1994, the preponderance of net financing came from long-ten instruments, but for the first time the majority of net State financing came from foreign currency loans. The low level of financing and the shift to foreign exchange instruments was part of a strategy by the Treasury to avoid what was perceived to be an abnormally high interest rate differential induced by exchange rate turbulence early in the year and sustained by the anti- inflation policy of the newly independent Bank of Spain.

Table 17.

Spain: State Nonfinancial Operations, 1990-94

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Sources: INE, Bank of Spain and Ministry of Economy and Finance.

Property income, gross operating surplus and transfers from other governments.

Net lending is defined as the change in the state government financial assets (excluding cash and other deposits).