Front Matter

Front Matter Page

© 2009 International Monetary Fund

April 2009

IMF Country Report No. 09/129

Spain: Selected Issues

This Selected Issues paper for Spain was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with the member country. It is based on the information available at the time it was completed on February 10, 2009. The views expressed in this document are those of the staff team and do not necessarily reflect the views of the government of Spain or the Executive Board of the IMF.

The policy of publication of staff reports and other documents by the IMF allows for the deletion of market-sensitive information.

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Front Matter Page



Selected Issues

Prepared by Christian Henn, Keiko Honjo, Marialuz Moreno-Badia (all EUR) and Alessandro Giustinian (MCM)

Approved by the European Department

February 10, 2009


  • Abstracts

  • I. Developments in the Spanish Housing Sector

    • A. Summary

    • B. The Boom

    • C. The Correction

    • D. Policy Conclusions

  • Boxes

  • 1. Data on House Prices in Spain

  • 2. Recent Housing Market Policies

  • Figures

  • 1. Run-up to EMU and Convergence

  • 2. Demographic Developments

  • 3. Supply Rigidities, House Prices and Debt Dynamics

  • 4. Demographic Housing Need

  • 5. Building Permits, Housing Starts and Completions

  • 6. Projected Scenario for Housing Starts, Completions and Value at Work

  • 7. Projected Scenario for Housing Investment and Employment

  • 8. Housing Slumps in International and Historical Perspective

  • Tables

  • 1. Demographic Housing Needs, 2007–2015

  • 2. Construction Sector Dynamics

  • 3. Construction Activity: Regression Results

  • 4. Recent House Price Developments

  • References

Abstracts of the Selected Issues Papers

Chapter I—Developments in the Spanish Housing Sector

Spain's housing boom was supported by rapid economic expansion, strong employment growth, an immigration boom, and low real interest rates. With the abrupt drying up of funding since mid-2007, these factors have eroded quickly. Through 2010, employment and value added in construction are projected to halve as peak housing starts are completed. Given that these home completions are adding to an already substantial inventory, the sharp fall in activity (housing starts) is inevitable in order to assist market clearing and orderly house price adjustments. The authorities have launched efforts to help limit foreclosures and to activate the underdeveloped rental market. In the medium run, housing market cyclicality could be reduced by fading out generous home ownership incentives.

Chapter II—The Spanish Banking Sector

The Spanish banking sector has weathered well the first impact of the financial turmoil. Cautious regulation, sound supervision, and strong retail-oriented business models have served Spanish banks well. However, the financial crisis continues to affect severely the banks’ operating model. With wholesale funding drying up, Spanish banks have started restructuring their balance sheets. The outlook is very challenging given high private sector indebtedness, as well as the severity and suddenness of the economic downturn. Staff stress tests, based on public data, suggest a likely need for additional capital, depending on how long and deep the crisis continues. The authorities are monitoring developments closely, and some bank consolidation appears likely to rationalize the wide-spread banking system.

Chapter III—The Long-run Fiscal Outlook and the Public Sector Balance Sheet

Spain, like most industrialized countries, faces population aging with significant budgetary implications. Despite an improvement in the fiscal position over the past 15 years, the downturn in overall activity and in the housing market have exposed that the underlying structural fiscal position may not be as strong as was previously thought, and needs to be bolstered to cope with the challenges going forward. The analysis of this paper, which maps the results of a long-run baseline scenario into the public sector balance sheet, suggests that current fiscal policies are not sustainable. To enhance transparency into the long-run fiscal challenges, and to bring out options for policy decisions to tackle these issues, the paper recommends that the authorities publish the public sector balance sheet every year as part of the budget documents. The public sector balance sheet can offer valuable guidance to long-term fiscal policy as a complement to the Stability and Growth Pact.

Chapter IV—Productivity Growth and Structural Reforms

Spain’s relatively poor productivity performance during the last decade has widened the gap with the EU and the U.S. The productivity gap appears due more to the lack of dynamism within industries, than to reallocation effects between industries. With the growth model of the last decade all but exhausted, an economic resurgence will likely require substantial productivity improvements. The analysis in this paper suggests that structural reforms in labor and product and services markets could help increase productivity growth. These reforms are particularly important for the ICT sectors, where Spain stands to get the largest gains from productivity catch-up.


  • II. The Spanish Banking Sector

    • A. Market Structure and Competition

    • B. Main Trends

    • C. The Impact of the Financial Turmoil

    • D. A Simple Macro Stress Test of the Spanish Banking Sector

    • E. Conclusions

  • Boxes

  • 1. Spanish Credit Institutions

  • 2. Breakdown of Banks’ Return on Equity

  • 3. Spanish Government Assistance to Banks

  • Figures

  • 1. Economic and Financial Catching-up; 1997–2007

  • 2. Financial Sector Breakdown

  • 3. Market Share of Credit Institutions; 1999–2007

  • 4. Credit and Deposit Developments; 1997–2008

  • 5. Distribution of Domestic Credit; 1997–2008

  • 6. Securitization; 2000–2007

  • 7. Banking Sector Profitability; 2003–2007

  • 8. Banks’ Return on Equity Breakdown; 2002–2008 (H1)

  • 9. Banking Sector’s Soundness Indicators; 2003–2007

  • 10. Credit Growth, Non-Performing Loans and Loan-Loss Provisions; 1999–2008

  • 11. Refinancing Operations with the Euro-System; 2006–2008

  • 12. Non-Performing Loans Developments; 1999–2008

  • 13. Santander and BBVA; 2007–2009

  • 14. Small Banks and Cajas; 2007–2009

  • 15. Residential Mortgage Backed Securities

  • 16. NPLs Regression Result and Stability

  • 17. Macro Assumptions; 2008Q3–2009Q4

  • 18. Non-Performing Loans Projections

  • 19. Comparing Crises (1994 vs. 2008)

  • Tables

  • 1. Mergers and Acquisitions of Credit Institutions; 1999–2007

  • 2. Market Concentration and Competition

  • 3. Foreign Business of Consolidated Groups and Individual Institutions; 2000–2007

  • 4. Pricing of the Government Guarantee

  • 5. Results of the Regression on Non-Performing Loans

  • 6. Loss Given Default Estimates for Different Portfolios

  • 7. Hypothesis on Loss Given Defaults

  • 8. Stress Test Results

  • III. The Long-Run Fiscal Outlook and the Public Sector Balance Sheet

    • A. Introduction

    • B. Long-Run Fiscal Outlook

    • C. A Preliminary Public Sector Balance Sheet

    • D. Concluding Remarks

  • Tables

  • 1. General Government Operations 2005–2060

  • 2. Public Sector Balance Sheet (Preliminary)

  • References

  • IV. Productivity Growth and Structural Reforms

    • A. Introduction

    • B. What Are the Facts?

    • C. Productivity Scenarios

    • D. Can Policies Help?

    • E. Conclusions

  • Figures

  • 1. Output and Productivity Growth

  • 2. Labor Productivity Growth

  • 3. Hours Worked by High-Skilled Labor

  • 4. Contributions to Labor Productivity Growth by Sectors

  • 5. Contributions to TFP Growth by Sectors, 1995–2005

  • 6. Contributions to TFP Growth, 1995–2005

  • 7. Product Market Regulation

  • 8. Temporary Employment and Employment Protection Legislation

  • Tables

  • 1. Contributions to Labor Productivity Growth

  • 2. Contributions to Labor Productivity Growth, 1995–2005

  • 3. TFP Growth Scenarios

  • 4. Productivity Growth Model

  • Appendix

  • Data Sources and Definitions

  • References