Spain: Staff Report for the 2013 Article IV Consultation

This 2013 Article IV Consultation highlights that the Spanish economy accumulated large imbalances during the long boom that ended with the global financial crisis. Unemployment soared, the fiscal position deteriorated sharply, and funding conditions tightened for both the public and private sectors. Key imbalances are correcting rapidly. Growth has been negative in the last seven quarters, unemployment has reached high levels, and financing conditions remain tight for small firms. The reform process has accelerated and deepened. Decisive reforms in the labor, financial, and fiscal sectors, in line with past IMF staff recommendations, is helping stabilize the economy.

Abstract

This 2013 Article IV Consultation highlights that the Spanish economy accumulated large imbalances during the long boom that ended with the global financial crisis. Unemployment soared, the fiscal position deteriorated sharply, and funding conditions tightened for both the public and private sectors. Key imbalances are correcting rapidly. Growth has been negative in the last seven quarters, unemployment has reached high levels, and financing conditions remain tight for small firms. The reform process has accelerated and deepened. Decisive reforms in the labor, financial, and fiscal sectors, in line with past IMF staff recommendations, is helping stabilize the economy.

Context: Rebalancing After the Boom-Bust

1. The Spanish economy accumulated large imbalances during the long boom that ended with the global financial crisis. After a brief stabilization in 2010, the economy fell back into recession in mid-2011 as the euro area crisis spread to Spain and Italy. Unemployment soared, more than tripling in five years to 27 percent. The fiscal position deteriorated sharply. Funding conditions tightened for both the public and private sectors, culminating in Spain’s 10-year sovereign yields hitting 7½ percent in summer 2012 and banks borrowing some 40 percent of GDP from the ECB.

2. More recently, however, there have been a number of positive developments. Most importantly:

Imbalances are correcting

  • Sovereign yields have fallen sharply since the OMT announcements and the second Greek program in H2 2012 (although there is a risk that the increase in recent weeks could herald a return to higher yield environment). Financial conditions also eased for banks, allowing them to reduce their reliance on the ECB.

  • The current account swung rapidly into surplus as exports recovered strongly (among the fastest in the euro area) and weak domestic demand restrained imports, stabilizing the IIP. Price competitiveness indicators are improving, especially unit labor costs (see background note).

  • House prices are falling fast and are down a third from their peak (but are still likely some 15 percent overvalued). Construction employment is half of its peak. Private sector debt is declining.

  • The fiscal deficit (excluding financial sector costs) fell sharply from 9 percent of GDP in 2011 to 7 percent in 2012, despite the interest bill increasing and the recession. The cyclically-adjusted primary balance improved by 3 percent of GDP. And in contrast to 2011, the deficit of regional governments fell sharply in 2012, with all regions reducing their deficits, some very substantially.

  • Underlying inflation and wage pressures eased. Inflation at constant taxes fell 0.3 percent in May (though headline inflation remained around 1½ percent). Wages in the business sector fell 0.3 percent in Q1.

Chart 1.
Chart 1.

Change in Cyclically Adjusted Primary Balance, 2012

(percent of GDP)

Citation: IMF Staff Country Reports 2013, 244; 10.5089/9781484343180.002.A001

Source: Fiscal Monitor, IMF.
Figure 1.
Figure 1.

Spain: Recent Economic Developments

Citation: IMF Staff Country Reports 2013, 244; 10.5089/9781484343180.002.A001

Sources: Bank of Spain; Haver; and IMF staff estimates.

The reform process has accelerated and deepened

  • The authorities have made substantial progress in structural reforms in recent years, in line with staff advice, especially to strengthen the financial sector, improve the functioning of the labor market, and upgrade the fiscal framework. Ongoing efforts, especially to establish a fiscal council, ensure the sustainability of the pension system, and enhance competition in domestic markets, are also in line with past staff advice.

  • Decisive action has been taken to help clean up banks in the context of a €100 billion (10 percent of GDP) financial sector program from the ESM, and for which the Fund is providing technical assistance. Provisions and capital were greatly increased following an independent stress test and asset quality review in summer 2012, using €41 billion of the ESM facility. Weak banks are being restructured and much of their real estate assets have been transferred to an asset management company (SAREB). Regulation and supervision was also enhanced.

  • A major labor market reform was instituted in February 2012 to improve firms’ ability to adjust working conditions (including wages), reduce duality, and promote job matching and training. Unemployment insurance was reduced by 17 percent after 6 months of benefits, and hiring subsidies were reformed. In February 2013, the government announced more flexible hiring arrangements and tax incentives to support youth employment and entrepreneurship.

  • Product and service market reforms are underway. The government liberalized the establishment of small retail stores and retail business hours. Further reforms have been announced, in particular, to remove regulations that fragment the domestic market, to liberalize professional services, and to foster entrepreneurship.

  • Fiscal frameworks and transparency have been substantially upgraded. An independent council is being introduced and a commission of experts has issued a proposal to ensure pension system sustainability. Early and partial retirement rules were further tightened. Monthly reports are now available for all major levels of government. A commission is reviewing public administration functions to eliminate overlaps/increase efficiency.

Chart 2.
Chart 2.

Commitment to Reform, Adjusted for Difficulty

(index)

Citation: IMF Staff Country Reports 2013, 244; 10.5089/9781484343180.002.A001

Source: OECD, Going for Growth, 2013.The index “commitment to reform” is based on whether significant action has been taken relative to past OECD recommendations (in Going for Growth reports), taking a value of 1 if significant action has been taken and zero otherwise. The index is adjusted according to the difficulty of undertaking the respective reform, measured by the inverse of average responsiveness to priorities in this area in non-crisis circumstances across the OECD or the BRICS.
Chart 3.
Chart 3.

Structure of Two Recessions

(cumulative percentage change)

Citation: IMF Staff Country Reports 2013, 244; 10.5089/9781484343180.002.A001

Source: INE.

But the adjustment process is proving slow and difficult

  • Growth has been negative in the last seven quarters, and output is down 7 percent from its peak. Unlike the first dip of the recession, the second is proving shallower, but longer. It is also marked by fiscal consolidation rather than stimulus, but has benefited from stronger net trade and less sharp investment contraction.

  • Unemployment increased further to 27¼ percent in Q1. The increase since 2007 (19 points in 6 years) is unprecedented in Spain’s history and the sensitivity of unemployment to growth in 2012 was one of the highest in the world. Unemployment is disproportionately affecting workers with temporary contracts and the young (57 percent unemployed in Q1 2013), reflecting Spain’s highly dual labor market.

  • Immigration has reversed, as both foreigners and nationals leave due to poor job prospects.

  • Despite the fall in sovereign spreads, financing conditions remain tight, especially for smaller firms. Credit is falling at about 7 percent annually (9 percent for firms), lending rates on small loans are much higher than in core euro area countries and many banks have either no wholesale market access or only at high cost. NPLs continue to rise, reaching 10½ percent in March.

  • Gains in unit labor costs reflect labor shedding (the marginal worker is typically less productive), but wage moderation too is starting to play a greater role. Although the net IIP has stabilized, the level (minus 93 percent of GDP) remains among the weakest in the euro area. Reducing unemployment while avoiding external imbalances reopening would require a significantly weaker real exchange rate. While estimates of current account norms do not suggest a significant current account gap, model-based REER analysis, as well as the overriding need to sharply improve the net IIP position, suggest an overvaluation of 8-12 percent (see background note).

  • Falling household incomes are preventing progress on reducing high (above US) household leverage. Median household real income has fallen 10 percent since 2009, forcing households to cut their savings rate to historical lows to support consumption.

  • Firms are deleveraging by cutting employment and investment in the face of costly financing and weak demand prospects and are increasingly net lenders to the rest of the economy. Their debt/GDP ratios, however, remain among the highest in the euro area and twice their 1990–99 levels. While the insolvency law is relatively modern, it is little used to facilitate early rescue of viable firms and swift liquidation of unviable ones (for example, most insolvency proceedings eventually end in liquidation rather than restructuring). There is no personal insolvency regime providing for a fresh start for responsible debtors, unlike most other EU jurisdictions.

  • Government debt rose to 84 percent of GDP in 2012 and the 7 percent of GDP deficit remains among the highest in the EU.

Chart 4.
Chart 4.

ULC Total Economy Growth Relative to EA17, since 2008

Citation: IMF Staff Country Reports 2013, 244; 10.5089/9781484343180.002.A001

Source: Eurostat.
Chart 5.
Chart 5.

Real Median Household Disposable Income

(index, 2008=100)

Citation: IMF Staff Country Reports 2013, 244; 10.5089/9781484343180.002.A001

Sources: US Census Bureau; Eurostat; and IMF staff calculations.
Chart 6.
Chart 6.

Risk of Poverty and Social Exclusion and its Components 1/

(percentage change between 2008 and 2011)

Citation: IMF Staff Country Reports 2013, 244; 10.5089/9781484343180.002.A001

Source: EU SILC.1/ AROP: at-risk-of poverty rate (60% of median income); 5MD: severe material deprivation; LWI: people (0-59 not students) living in households with zero or very low work intensity; AROPE: at-risk of poverty or exclusion rate (union of all three indicators).

Outlook: A Long and Difficult Adjustment

3. The outlook is difficult and risks are high. Recovery from a financial crisis, for both output and unemployment, is typically weaker than a normal recovery. This is compounded by the imperative for fiscal consolidation and private sector deleveraging. Key external risks include a new bout of financial market stress, delayed banking union (both of which would raise borrowing costs for Spain), and a slowdown in Emerging Markets (which would significantly undermine exports as non-euro area countries accounted for most of the recent growth—see the Risk Assessment Matrix). Staff sees three main scenarios:

  • Baseline—prolonged weakness. The government is expected to meet its structural consolidation targets, implying (inevitably) a drag on growth during the medium term—staff assume a multiplier of around 0.9 on average, reflecting the recession, the relatively closed economy, the exogeneity of monetary policy, high private debt, and the reliance on expenditure reduction. (Important note: staff’s baseline, including in the April WEO, had previously assumed no additional discretionary fiscal consolidation as measures had not been fully identified. However, given the government’s strong fiscal effort, staff now consider likely that additional measures will be taken to achieve structural targets, even if not yet specified. The incorporation of higher fiscal consolidation improves the projected debt dynamics but also implies a lower growth path; absent this effect, the underlying growth outlook has improved slightly since the April WEO.) Private consumption is likely to remain constrained by modest wage and employment growth, the need to reduce high leverage ratios, and the historically low savings rate. Strong net exports will remain the key driver of the gradual recovery, as exports increase market share in the near future (reflecting gains from a growing export base) and domestic demand restrains imports, resulting in a large current account surplus. Growth, following recent indicators, is expected to turn positive later this year and to gradually pick up to around one percent in the medium term. The weak recovery will constrain employment gains, with unemployment remaining above 25 percent in 2018.

Chart 7.
Chart 7.

Spain: Risks

Citation: IMF Staff Country Reports 2013, 244; 10.5089/9781484343180.002.A001

Chart 8.
Chart 8.

Unemployment Rate Projections 1/

Citation: IMF Staff Country Reports 2013, 244; 10.5089/9781484343180.002.A001

1/ Based on a annual bivariate VAR of GOP growth and unemployment, with 3 lags. Shaded areas are for the 1 and 2 standard deviation errors (1O00 Monte Cario simulations)
Figure 2.
Figure 2.

Spain: Private Sector Debt is Weighing on Demand

Citation: IMF Staff Country Reports 2013, 244; 10.5089/9781484343180.002.A001

Sources: Bank of Spain; INE; OECD; FRB; Haver; and IMF staff calculations.1/ Includes trade credit.2/ Data are quarterly. 0 is the peak of household debt for each country.
  • Upside. A possible alternative scenario, where reforms (both by Spain and Europe) accelerate and gain more traction, would entail a stronger recovery, in line with the government’s projections. The recovery may also benefit from more growth-friendly fiscal measures and would result in growth accelerating to 2 percent by 2018 and significantly boosting employment as labor reforms restrain labor costs over the medium term.

  • Downside. Deleveraging pressures and financial distress could intensify, creating a negative macro-financial feedback loop that leaves both private and public debt at elevated levels for the foreseeable future. The fiscal measures adopted could also have high multipliers. As a result, growth would only turn positive in 2017 and unemployment remains above 27 percent.

Chart 9.
Chart 9.

GDP Growth

(percentage change)

Citation: IMF Staff Country Reports 2013, 244; 10.5089/9781484343180.002.A001

Source: IMF staff projections.
Chart 10.
Chart 10.

Unemployment Rate

(percent)

Citation: IMF Staff Country Reports 2013, 244; 10.5089/9781484343180.002.A001

Source: IMF staff projections.

4. That Spain adjusts smoothly is of critical importance for the euro area, and hence for the global economy. Spain’s outward spillovers through financial markets have been systemic for Europe. Strong sovereign-bank linkages and sizable exposures to the rest of the world through asset and liability cross holdings have made Spain an important hub for receiving and transmitting shocks (see background note). Some of the key global risks emanate from Europe, in particular, that problems in the euro area could re-ignite financial stress in global markets, and prospects for world growth could be hit by protracted stagnation in Europe. A failure by Spain to resolve its imbalances smoothly and restart growth could be one of the triggers. These externalities have been reflected in the large support from the euro area since the global financial crisis, including large-scale ECB borrowing, the ESM-supported financial sector program, the OMT announcements, and more generally the impetus for a more complete monetary union.

5. The political situation appears stable but social tension could compromise the reform effort. The government has a large majority, no general elections until late 2015, and has faced only limited social unrest. But the economic context has reduced the popularity of the two main parties, which could make public support for new difficult reforms more challenging. There is a risk that regional-center tensions could also increase and political fragmentation yield inconclusive elections in the future.

Authorities’ views

6. The authorities considered that the staff’s baseline medium-term scenario is overly pessimistic and stressed that the government’s growth projections are prudent. In particular, they argued that staff’s estimated impact of the ongoing structural reforms on growth is very small and that staff assumes an excessively high fiscal multiplier in the medium term. The authorities considered that relatively high fiscal multiplier estimations might be applicable for recessionary periods in the short term in an environment of financial crisis that impedes the reallocation of resources, but less so for the medium term. They also pointed out that there are recent encouraging indicators that the economy is stabilizing. Investment, employment and confidence were gravely affected by the broader euro area financial crisis and financial fragmentation in 2012. In an improved environment in which the financial sector channel ceases to be impaired, the authorities argued that fiscal consolidation will be less of a drag on growth beyond the short term. That said, the authorities recognized the challenges, including the difficult initial conditions, and reaffirmed their commitment to advance the reform process, which will help increase competitiveness, employment, and growth.

The Policy Imperative: Jobs and Growth

7. This outlook calls for raising the reform effort to the level of the challenge. Spain—supported by euro-area policies—needs to deliver on its announced program, and indeed go further in key areas. The focus should be on a jobs-friendly strategy that allows the economy to grow and hire rather than shrink and fire. This means making prices adjust rather than quantities, helping the private sector delever, making sure banks can extend credit to healthy businesses, and minimizing the drag from the inevitable fiscal consolidation. It also means avoiding any tendency to take the prospective economic stabilization as a reason to slow the reform effort.

A. Labor: Reinforcing the Reform to Generate Jobs

8. The recent reform is having some positive effects. Wage growth has moderated, firms are using the increased flexibility to reduce working hours instead of reducing jobs, and opt-outs are increasing. Wages in the public sector and large firms have fallen. The share of “objective dismissals” has increased and dismissal costs have fallen.

Chart 11.
Chart 11.

Working Hours Flexibility

(index, 2007=100)

Citation: IMF Staff Country Reports 2013, 244; 10.5089/9781484343180.002.A001

Source: Eurostat.

9. But other components of the reform have been less successful. There has been little change in the sharp division (i.e., duality) of the labor market between those with permanent jobs (with high dismissal costs) and those with temporary jobs (with low dismissal costs). The probability of finding a permanent job remains too low and that of losing a temporary job too high. Recruitment under the new permanent contract was only a small fraction of hiring. While the use of opt-outs clauses is growing, in the 12 months following the reform, they covered less than one percent of industry-region wide contracts. There is still some uncertainty about the judicial interpretation of the criteria for objective dismissal.

Chart 12.
Chart 12.

Probability of Finding a Job by Type of Contract and Employment Destruction

(percent)

Citation: IMF Staff Country Reports 2013, 244; 10.5089/9781484343180.002.A001

Source: FEDEA.

10. Labor market dynamics do not seem to have improved sufficiently. Increasingly, wage inflation in the private sector is moderating, but has not fallen commensurately with the large excess supply of labor. Although this situation may change in the coming months with the expiry of many agreements, private sector wages have grown 10 percent between 2008 and 2012 (in line with the euro area) while employment fell 15 percent (much more than in the euro area). Other countries facing similar shocks but with more flexible labor and product markets have fared better.

Chart 13.
Chart 13.

Nominal Wage

(Index, 2000Q1=100)

Citation: IMF Staff Country Reports 2013, 244; 10.5089/9781484343180.002.A001

Source: Eurostat.
Chart 14.
Chart 14.

The Wage Phillips Curve since 2008

Citation: IMF Staff Country Reports 2013, 244; 10.5089/9781484343180.002.A001

Sources: US Census Bureau, Eurostat, and IMF staff calculations.

11. Thus, labor market dynamics need to improve to reduce unemployment sufficiently. The burden of adjustment is still falling on employment (especially temporary and youth) rather than wages. Spain has historically never generated net employment when the economy grew less than 1½-2 percent. Yet growth is not projected to reach these rates even in the medium-term. Thus reducing unemployment to its structural level (still likely very high at around 18 percent) by the end of the decade would require a significant improvement in labor market dynamics. In particular, faster wage adjustment would likely lead to fewer people losing jobs (or consuming less for fear of this risk) and more unemployed being hired, both of which would lead to more private consumption. Businesses would also be more likely to hire and invest and net exports would contribute even more to demand.

Chart 15.
Chart 15.

Spain: Nominal Wage Bill Evolution

(index, 2007=100)

Citation: IMF Staff Country Reports 2013, 244; 10.5089/9781484343180.002.A001

Source: INE.
Chart 16.
Chart 16.

Growth and Unemployment, 1978-2018

Citation: IMF Staff Country Reports 2013, 244; 10.5089/9781484343180.002.A001

Sources: OECD; and IMF staff projections.

12. This suggests that the recent reform should go further. The government encouragingly intends to review the reform in the coming months, involving an international expert organization, such as the OECD. In the context of such a review, consideration should be given to:

  • Increasing flexibility. Wages and work arrangements should be more responsive to economic conditions. If no major improvement is seen as many agreements are re-negotiated this summer, deeper reform of collective bargaining may be needed, e.g., liberalizing opt-outs further or moving to a fully decentralized system. Eliminating “ultra-activity” (whereby contracts remain valid after they expire) and indexation would also support wage flexibility.

  • Reducing duality. This should ideally entail greatly reducing the number of contracts, based on a permanent contract with dismissal costs initially low and progressively increasing with job tenure. Alternatively, severance payments for permanent contracts should be aligned to EU average levels, the scope for judicial interpretation in dismissal proceedings reduced, and eligibility criteria for the recently-introduced permanent contract relaxed.

  • Enhancing employment opportunities. To help the unemployed find jobs, they need better training and placement services. For certain groups, such as the young and the low-skilled, more ambitious policies to reduce the cost (including tax cost) of employing them may be required.

13. An agreement between unions and employers could bring forward the job gains from structural reforms. Even under an upside scenario, wages and hiring would only adjust gradually, implying a protracted period of very high unemployment. Such an agreement could help accelerate this process and coordinate the economy to a better outcome (see Box on model-based simulations) and comprise: (1) employers committing to significant employment increases in return for unions agreeing to wage reductions and (2) some fiscal incentives in the form of immediate cuts in social security contributions offset by indirect revenue increases in the medium term. A large employment response and reduction in inflation will be critical so that household purchasing power in the aggregate does not suffer. Such an agreement should complement, not substitute, for structural reforms. The challenges for all parties involved are enormous, and it will be crucial to avoid an agreement that waters down or delays needed structural reforms.

14. This is a complex issue and various interlocutors expressed misgivings. Some argued that a strong agreement would be difficult to negotiate and enforce, there being currently little common ground between the different stakeholders. Unions will understandably be reluctant to accept further wage moderation and employers equally to give employment assurances. Others argued that if the employment response is not forthcoming, the result could be a significant drop in demand, a larger household debt overhang, and a higher deficit. There is also the risk that other structural reforms are delayed. Nevertheless, given the enormous size of the challenge faced and recognized by all parts, staff sees merit in exploring this option—if not now, in the future were unemployment not to fall significantly.

Wage-Employment Dynamics

Model-simulations illustrate the potential benefits from an ambitious social agreement on growth and employment from a faster process of internal devaluation. The assessment uses the IMF Global Integrated Monetary and Fiscal Model and is based on: (1) an agreement to reduce nominal wages, for illustrative purposes, by 10 percent over two years; and (2) a temporary fiscal stimulus to the wage cuts: social security contributions are reduced (the contribution rate is cut by about 1⅔ percent), followed by an increase in the VAT two years later (e.g. by broadening the base rather than raising the main rate)—the lag helps households during the period of falling wages. The adjustment in wages and prices is relatively fast, as the social agreement is assumed credible.

uA01fig01

Real GDP and Exports

(percentage, difference relative to baseline)

Citation: IMF Staff Country Reports 2013, 244; 10.5089/9781484343180.002.A001

Source: IMF staff simulations.

The results, while subject to inherent limitations of the model, suggest the wage reduction, and associated fall in prices, would have a significant positive impact on economic growth and support the fiscal adjustment. The wage/price decline would result in a real depreciation of around 5 percent over 3 years, boosting exports and slowing imports. Importantly, a credible social agreement would also have a large positive impact on investment given the lower production costs and improved outlook. As a result, GDP would be 5 percent higher than in the baseline. The fiscal deficit increases, but would fall rapidly afterwards as the fiscal accounts benefit from the VAT revenue increase and the stronger economy—in both cases public debt is lower than in the baseline in the medium term.

uA01fig02

Employment and Investment

(percentage, difference relative to baseline)

Citation: IMF Staff Country Reports 2013, 244; 10.5089/9781484343180.002.A001

Source: IMF staff simulations.

Employment would be 7 percent above the baseline scenario. With the fall in nominal wages, employment would grow at a faster pace especially in the second and third years—reducing the unemployment rate by about 6-7 percentage points by 2016. Private consumption could fall somewhat in the first year, but the drop would be limited as households benefit from lower social contributions. Nevertheless, the simulations suggest that the rise in employment and lower CPI inflation (prices would be lower by 4-5 percent after two years) would prove enough to boost consumption growth already in the second year. The model also has savings rising by 2-2½ percent in the first years (to proxy for household debt effects)—if this does not happen, consumption could be further supported. Over the medium term, consumers are better off in both scenarios given stronger output and employment.

Authorities’ views

15. The authorities argued that the labor market reform is working but will take more time to see its full impact. They underscored that economic agents are still learning how to use the new tools. Following the reduction of ‘ultra-activity’, a number of collective agreements will expire, triggering an opportunity to adjust working conditions, foster labor productivity, and protect jobs. The government also pointed out that it was unrealistic to expect a quick recovery in hiring during such an intense recession and with financial fragmentation.

16. There was some recognition that a social mechanism on the lines staff suggested might have theoretical appeal, but it was viewed as difficult to be achieved and entailing some risks. The authorities did not see the present social environment as sufficiently receptive for such an agreement and feared that trying to reach one might stall crucial structural reforms. There was also concern about a broad range of implementation problems like the difficulty to differentiate across sectors and individual businesses, as well as the risk of unstable dynamics if the agreement is incomplete, including through the impact on household spending and the ability to service debt.

B. Helping the Private Sector Delever

17. The necessary deleveraging of high private sector debt should be made as efficient as possible. Resources currently tied up in non-viable firms need to be reallocated to viable firms that can invest and hire, and debt-overhangs should not impede profitable operations. Insolvent, but responsible, individuals should have the prospect of eventual discharge from their debts and the incentive to participate in the formal economy. While any change must not compromise financial stability, there is scope to continue to improve the insolvency regime (see background note):

  • Corporate. The process could work better by: (1) reforming the legal framework to provide incentives for early rescue of viable firms and eliminate heavy procedural requirements to expedite liquidation of unviable firms (2) strengthening the institutional framework (e.g., enhancing commercial courts’ capacity) and (3) setting up frameworks to further encourage out-of-court debt restructurings, particularly for SMEs (e.g., mediation).

  • Personal. The authorities have implemented important measures to address residential mortgage debt distress. To strengthen the toolkit for addressing household debt distress more generally, priorities include: (1) fine-tuning existing measures to support further out-of-court restructurings (e.g., centralized guidelines for workouts; mediation) (2) further improving access to information and advice for highly-indebted individuals and (3) considering in the future establishing a special personal insolvency regime with a fresh start for financially responsible debtors.

Chart 17.
Chart 17.

Drivers of Employment Loss, 2008-2011 1/

(Employment growth percent)

Citation: IMF Staff Country Reports 2013, 244; 10.5089/9781484343180.002.A001

Sources: IMF, World Economic Outlook database; Eurostat; and IMF staff estimates.1/ From forthcoming IMF Working Paper by Bakker and Zeng.

18. Staff viewed the measures to address residential mortgage distress a step in the right direction but not enough to help over-indebted—but financially responsible—individuals. Hence, going forward, a more comprehensive approach that includes an effective personal insolvency regime with strict eligibility conditions for clearly insolvent people who dispose of their assets, including their houses, to pay their outstanding debts and remain financially responsible over a reasonable period of time (normally 3 to 5 years) to obtain a fresh start. Other countries, including several in the EU since the crisis, have already introduced such regimes without endangering financial stability or affecting credit discipline and payment culture.

Authorities’ views

19. The authorities considered recent measures adequate. The measures addressed to more socially vulnerable households offer a high degree of protection for the debtor (including the possibility of cancelling the mortgage by transferring the property, and offering opportunities for public housing), and the mortgage law has been modified to rebalance the position of mortgage debtors and providing for a system of debt relief. They also consider that they represent an adequate balance between financial stability and the necessity to address household debt distress. In the current situation, a personal insolvency regime that includes a different solution for mortgages would overburden the courts, could lead to strategic defaults, and jeopardize Spain’s strong payment culture. The authorities are preparing new legislation to address corporate debt overhang and were open to consider proposals to further improve the corporate insolvency regime.

C. Financial: Supporting Credit While Safeguarding Financial Stability

20. The ESM-supported financial sector program has accelerated the clean-up of the system. The Memorandum of Understanding signed in July 2012 provided a clear roadmap and the resources for implementing the necessary overhaul, under tight deadlines. Important progress has been achieved (as detailed in the Fund’s quarterly monitoring reports). Weak but viable banks have been recapitalized through an independent stress test exercise and an asset quality review, and restructuring/resolution plans adopted. Additional capital augmentation has been achieved through burden sharing with subordinated debt and preference shares, the transfer of assets and loans to a newly incorporated asset management company (SAREB), and private-capital raising efforts. Through a new draft law, the regime for savings banks is being substantially improved. The Bank of Spain’s regulatory and supervisory powers and procedures have also been strengthened.

Chart 18.
Chart 18.

Spanish Banking System: Profits, Losses and Dividends

(billions of euro) 1/

Citation: IMF Staff Country Reports 2013, 244; 10.5089/9781484343180.002.A001

Source: Bank of Spain.1/ Data could Include some duplication of losses for banks, shareholders of Cajas.
Chart 19.
Chart 19.

How the Stress Test Capital Shortfalls Were Covered

(billions of euro)

Citation: IMF Staff Country Reports 2013, 244; 10.5089/9781484343180.002.A001

Source: Banco de España.

Restructuring of the Spanish Banking Sector: Milestones

article image
Source: IMF staff, Banco de España, Moody’s

21. This clean-up has so far cost about 6 percent of GDP in public money, excluding large contingent liabilities. Since the first financial support measures launched in 2009, some €63 billion has been injected by the state into the system, of which €41 billion was drawn from the EFSF/ESM. On top of this, contingent aid has been provided under the form of either state guarantees on bonds issued by banks and SAREB (€105 billion outstanding) or asset protection schemes. While there was considerable burden sharing, the government decided not to take full ownership of the insolvent institutions recapitalized with public funds and chose to grant holders of subordinated debt and preference shares substantial equity in the new institutions (around a third on average, totaling about €4¼ billion at mid-June market values), reducing future potential returns to the taxpayer.

Restructuring of the Spanish Banking Sector: The Taxpayer’s Balance

(cumulative balance until May 2013)

article image
Source: Banco de España.

Maximun amount of losses covered by Asset Protection Schemes (APS), on certain asset classes; (2) Total outstanding amount at the end of May 2013: 53.873 m €; (3) On UNIMM: up to 80 percent of € 6029 million; (4) On Banco de Valencia: up to 72.5 percent of € 6022 million; (5) Aid for Banca Civica (principal plus interest) repaid to Frob (April 2013); (6) On BBK-Cajasur: up to €392 million; (7) On CAM: up to 80 percent of € 20.762 million; (8) On CCM: up to € 2.475 million; (9) Ownership percentages are estimates, after completion of SLE.

22. The banking system is now stronger, safer, and leaner. The system’s capital has been boosted, with all banks covered by the stress test over the minimum regulatory requirement (9 percent core tier I) at end-March, once the estimated effects of pending capital augmentation measures (e.g., completion of burden-sharing exercises and sales/mergers under the program) are included (though core tier I ratios are still on the low side compared to peers under fully-loaded Basel III). Credit provisions have also increased and the intervened banks are implementing EC-approved restructuring/resolution plans. The number of banks fell from 50 in 2009 to 15 currently, with employees and branches reduced by about 13 percent over this period.

23. But risks remain elevated. While the ESM-supported program is helping tackle legacy problems, risks, especially macro-financial, continue to loom large, in line with the difficult macroeconomic outlook:

  • Loan books will likely continue to deteriorate. As long as economic growth remains weak and unemployment stays high, nonperforming loans will continue to increase, and with them the need for banks to provision.

  • Earnings will likely remain under pressure. They will be impacted by low business volumes, low margins, and high credit provisions. Some banks may struggle to generate enough profit to maintain current capital levels without further deleveraging.

  • Access to markets will likely remain limited, and expensive. Unless sovereign and bank spreads decline significantly, wholesale markets will remain too expensive to be a major funding source for many banks. Indeed, bond yields and market volatility have risen since May and, if sustained, could force weaker banks to rely on the ECB for funding and/or to delever faster.

  • Banking and macro interactions could generate a negative feedback loop. If the macroeconomy weakens and the outlook remains uncertain, banks could delever faster, which in turn could lead to less growth and weaker confidence.

Chart 20.
Chart 20.

Improvements in Capital and Provisioning, 2008-12

(percent)

Citation: IMF Staff Country Reports 2013, 244; 10.5089/9781484343180.002.A001

Source: Bank of Spain.1/ Core tier I ratio estimated for 2008-2011.

24. There are also operational risks. SAREB has a large number of assets that are complex and costly to manage and whose price is intimately linked with economic prospects. Restructuring / resolution plans of intervened banks are complex and challenging, and the franchise value of the weaker ones might fall faster. The burden sharing exercise involves many thousands of retail investors and entails litigation risk from potential widespread allegations of mis-selling.

25. These risks call for proactive vigilance to protect the hard-won solvency of the system and to support credit and growth, in particular, continuing to:

  • Keep banks’ loan books clean and reinforce the quantity and quality of capital. The recent guidelines tightening classification of refinanced loans (some 15 percent of total loans) should be used for this end and the market for distressed assets should be fostered (for example, by moving the tax on real estate transactions to real estate values and tightening time limits on full write-offs). This may require more provisioning and/or capital, which in turn calls for extremely prudent capital management. To avoid exacerbating credit constraints, the focus should be on increasing the nominal amount of capital, for example, via restrictions on cash dividends or issuing more equity. Raising fresh capital would be challenging in a downside environment.

  • Remove possible credit supply constraints, while preserving loan quality. There are no straight-forward solutions, but consideration could be given to credit risk sharing via targeted guarantee and securitization schemes, further fostering non-bank financing, and clearing public sector arrears. Maintaining bank access to ample and cheap Eurosystem liquidity would also help.

  • Provide incentives. The above actions (e.g., issuing equity, forgoing dividends, stepping-up provisioning, disposing of distressed assets, easing the pace of credit contraction) could be further incentivized by the government offering to swap banks’ deferred tax assets (some €51 billion, a third of core tier I capital) for tax claims (as recently implemented in Italy), conditional on the degree to which banks take the above actions. This would improve the loss absorbency and liquidity of banks’ capital at potentially little cost to the government.

26. Supervisory practices should build on achievements under the financial sector assistance program. In particular, rigorous and regular forward-looking scenario exercises on bank resilience and capital needs should occur regularly to guide supervisory action.

27. By contrast, banks argued that falling SME credit reflects falling demand from healthy firms. They argued they have liquidity and the incentive to lend given high SME lending rates, and that the problem is one of inherent risk of lending to SMEs in the current macroeconomic context. More generally, it was desirable and inevitable that credit should fall after the boom and reflects the necessary restructuring of the system—more lending now could just mean more losses later. Staff countered that distinction between demand and supply is not clear cut—lower lending rates would increase the amount of demand—and there are also signs that there could be credit supply constraints. Survey data indicate banks have tightened lending standards for a given creditworthiness and more firms indicate “access to credit” as their most pressing problem in Spain and the periphery than the core. Rising lending rates also seem inconsistent with a pure demand shock. There could also be disruption to credit relationships as many state-aided banks downscale operations as part of their restructuring plans.

Authorities’ views

28. The authorities largely agreed with the analysis and policy implications. While considering legacy problems from real estate largely addressed, they agreed that the risk now is that the hard-won bank recapitalization could be affected if macro weakness were to continue for longer than expected. They are developing an internal methodology to conduct, on a regular basis, different scenario exercises to assess bank resilience. They stressed that while earnings retention should have priority over dividends, this has to be targeted bank by bank, given the widespread differences in the system. On loan loss recognition, they underscored that the newly tightened supervisory rules will indeed improve the transparency of banks’ balance sheets and enforce appropriate provisioning. The authorities shared the preoccupation on credit, but stressed the difficulty in disentangling demand and supply factors and emphasized the need to improve the monetary transmission mechanism and financial fragmentation. They are working on measures to address the financing of the real sector.

D. Fiscal Consolidation: Minimizing the Inevitable Drag

29. Even after considerable effort, Spain is only half way along its needed consolidation path. Under staff’s baseline scenario (which combines the government’s underlying fiscal effort with staff’s more conservative macroeconomic assumptions), the public debt-to-GDP ratio will continue to grow until 2017 before declining at an accelerating pace thereafter as the structural deficit is eliminated by 2020. This structural balance anchor is consistent both with constitutional requirements and with putting debt on a significant downward path in the medium term so that public finances are sustainable and financing vulnerabilities reduced—a necessary condition for stronger growth in the future. This requires a very large structural fiscal effort given the implied need to improve the primary deficit (4 percent of GDP in 2012) to a considerable surplus (of around some 3-4 percent of GDP) in the medium term, and the weak growth outlook. Such an adjustment would be very large by international comparison.

Chart 21.
Chart 21.

Fiscal Deficit and Debt

(percent of GDP)

Citation: IMF Staff Country Reports 2013, 244; 10.5089/9781484343180.002.A001

Sources: Ministry of Finance; and IMF staff calculations.

30. To minimize the economic and social cost, the consolidation should be gradual. The government’s new medium-term structural deficit reduction targets strike a reasonable balance between reducing the deficit and supporting growth (with the cyclically-adjusted primary balance improving by about 0.8 percent of potential GDP from 2014). Given the need to stabilize the economy and assuming the structural consolidation in train for 2013 is delivered, significant additional measures for 2013 are undesirable. Going forward, it will be important to be flexible on the nominal (and, if necessary, structural) targets if growth disappoints.

Stability Program Update, 2013 1/

(percent of GDP)

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The fiscal deficit targets were revised after the publication of the Stability Program under the EDP as follows: 2013 -6.5; 2014 -5.8; 2015 -4.2; 2016 -2.8.

31. The adjustment path should be made more concrete and growth-friendly. The lack of sufficient specific measures in the government’s medium-term fiscal plan and, to a lesser extent, the lack of buffers in the macro framework (compared to staff’s baseline) undermines credibility, fosters ad hoc measures, and raises uncertainty.

  • In the near term, measures could focus more on increasing revenues from indirect taxes, which is relatively low, levied on a narrow base, and likely also to have low multipliers. This could be achieved by broadening the base of the standard rate of VAT and increasing excises.

  • To develop measures for future budgets, it would be useful to conduct targeted expenditure reviews of key functions such as health and education. The tax system would also benefit from being reviewed to mobilize more revenue in a more efficient and fairer way. A deepening of the 2011 pension reform is needed given the significantly worse dependency ratio projections and recent labor market trends (see background note). The impact on the poor of the consolidation measures should also be explicitly considered and counter measures implemented.

Chart 22.
Chart 22.

EU 15: Indirect Tax Revenue, 2012

(percent of GDP)

Citation: IMF Staff Country Reports 2013, 244; 10.5089/9781484343180.002.A001

Source: Eurostat.

32. The fiscal framework is being substantially upgraded and should be followed through with ambitious legislation and rigorous implementation. In particular:

  • Developing a more predictable and transparent approach to applying the enforcement provisions of the recent Organic Budget Stability Law. The strong performance by the regions in 2012 owed less to these enforcement provisions than to conditions (especially the reliance on financing from the center) which may not apply in the future. Thus continuing to develop the enforcement of the Organic Law would address the risk of future slippage and cement recent gains (see background note).

  • Strengthening the independence, both real and perceived, of the planned fiscal council is paramount. This would be helped by a non-renewable presidential term of at least five years.

  • Securing the sustainability of the pension system. The expert committee’s proposal on the “sustainability factor” provides a strong framework for sustainability and for evaluating alternative reform options.

  • Following through on the creation of a panel of experts to advise on tax and regional financing reform. Expenditure reviews, looking across several levels of public administration, would help find synergies, more efficient delivery of public services, and identify growth-enhancing measures.

  • Further improving budgeting and transparency, especially by combining the dispersed budgets and regional multi-year consolidation plans into one medium-term budget based on a detailed general government macro-fiscal projection, a baseline under unchanged policies, and with the impact of specific measures identified. Short of medium-term budgeting, future measures legislated now could ensure that targets are met. Risk reporting could improve by including stochastic and alternative medium-term scenarios and improving coverage of contingent risks (e.g. financial sector, road concessions, PPPs).

Authorities’ views

33. The authorities underscored the remarkable reduction in the fiscal deficit in 2012 in the middle of a recession and agreed with many of the above proposals. They also highlighted that all regional governments made significant progress in reducing their deficits and that fiscal reporting at the sub-national level was substantially upgraded. They also argued that the recently revised fiscal targets are more adequate, considering the state of the economy, and they are confident of meeting them. They agreed with the need to conduct tax and expenditure reviews and they pointed to the recent proposal on the pension sustainability factor by a panel of experts. The authorities viewed the new system of fiscal control as working well, even though modalities for its implementation are still being developed. They also highlighted that extraordinary liquidity facilities are complementing the enforcement provisions in the new Organic Budget Stability Law.

E. Structural: Building a World-Class Business Environment

34. Spain needs to do more to improve its business environment and boost competition. Spain ranks only modestly in international comparisons, benefiting from strong infrastructure, but suffering from the high burden of starting a business, administrative regulations in product markets that limit trade, and professional services that are not fully liberalized. Spain’s production structure is dominated by SMEs, which tends to slow productivity growth. These factors result in a lack of competition, highlighted by the lack of progress since the crisis in reducing the inflation differential built up during the boom years. Greater competition would also complement the labor reform by reducing profit margins and prices, and increasing the demand for labor.

Chart 23.
Chart 23.

Consumer Prices

(cumulative change in the period, percent)

Citation: IMF Staff Country Reports 2013, 244; 10.5089/9781484343180.002.A001

Sources: Eurostat; and BLS.
Chart 24.
Chart 24.

Business Environment: Selected Rankings within OECD, 2013

Citation: IMF Staff Country Reports 2013, 244; 10.5089/9781484343180.002.A001

Sources: OECD; WEO; WEF; and World Sank Doing Business Indicator.

35. The government plans a range of reforms in its National Reform Program (NRP) on which it needs to deliver fully and quickly. This will help Spain gain credibility in the short term and reap the growth benefits (estimated by the government at around 8 percent of GDP) in the medium term. The program for Market Unity, which will facilitate trade across regions in Spain, is potentially important and is underway. The much-delayed law to liberalize professional services needs to be delivered quickly and without being undermined by vested interests. With the aim of containing second round effects in inflation, the government has announced legislation to reduce indexation of prices in government operations. Consideration should also be given to reforms that encourage firms to grow (e.g., thresholds on firm size in the tax code). An independent “growth commission” (e.g., Australia’s Productivity Commission) could help set priorities, identify key measures and overcome political obstacles.

Chart 25.
Chart 25.

Impact of Structural Reforms

(percent of potential GDP)

Citation: IMF Staff Country Reports 2013, 244; 10.5089/9781484343180.002.A001

Source: National Reform Program.

Authorities views

36. The authorities agreed that Spain needs to boost competition, which their policies are targeting. The authorities are committed to fully implement their National Reform Plan. In addition to the flagship reforms, which will be approved according to the announced schedule, they are also continuously reviewing regulations to improve the business environment.

F. Pan-European Support

37. Much more should be done at the European level to ease Spain’s adjustment. Spain is systemic to the euro area and has been a key source of outward financial spillovers. While recent euro-area actions have reduced tail risks and alleviated financial market stress, they have not been sufficient to reverse fragmentation, improve monetary transmission, and deliver higher growth and employment, neither for the euro-area nor for Spain. Faster progress to full banking union, (including, if necessary, a flexibly used ESM bank recap mechanism), could break the sovereign/bank loop, allowing Spanish firms to compete for funds on their own merits rather than their country of residence. Further measures (including by the ECB) to reduce financial market fragmentation and ease credit conditions would help Spain’s adjustment. Spain would also benefit from flexible application of financial sector state-aid rules (i.e., deleveraging requirements attached to public capital injections), other European countries not ring-fencing their banks, and more support channeled through common resources (e.g., the EIB). Spain and the euro-area should also keep the option of an OMT-eligible program open as it could help cement market confidence and lower yields.

Authorities’ views

38. The authorities strongly agreed that more decisive action by Europe is needed, especially with banking union and the repair of the monetary transmission mechanism. While the sovereign has benefited from recent European actions, Spanish private institutions have not, and progress at the European level has fallen short of the challenges. The authorities noted that Spanish banks and firms are facing much tighter funding conditions than their peers in core Europe, independently of the financial strength of the individual firm. The problems are particularly exacerbated for SMEs. The authorities stressed the critical issue now is to create the conditions for credit to flow and promote economic growth in the Euro area. In particular, the ECB could do more to repair the monetary transmission mechanism and faster progress should be made in implementing the banking union to create a level playing field, solve the lingering problem of ring-fencing of financial assets within the euro area, and ensure financial stability.

Staff Appraisal

39. Progress on critical reforms has been strong and the needed adjustment is well underway, but the economy remains in recession amid unacceptable levels of unemployment. Decisive reforms in the labor, financial, and fiscal sectors, in line with past staff recommendations, is helping stabilize the economy. External and fiscal imbalances are correcting rapidly. Sovereign borrowing costs have improved substantially. But, hampered by private sector deleveraging, fiscal consolidation, and labor market rigidities, output has contracted for seven quarters and unemployment has reached 27 percent.

40. The outlook remains difficult and risks are high. Growth should start to turn positive later this year, but will likely only gradually pick up in the medium term, with limited gains in employment. A more favorable scenario is within reach, especially in the medium term if the envisaged reforms are fully implemented by Spain and Europe. But there are also significant downside risks which could result in a more protracted recession.

41. This calls for urgent action to generate growth and jobs, both by Spain and Europe. Spain needs to deliver on its announced program, and indeed go further in some areas, while euro area policies need to be more supportive. It also means avoiding any tendency to take the prospective economic stabilization as a reason to slow the reform effort.

42. Labor reform needs to go further to generate jobs. Last year’s reform made substantial improvements and is gaining traction. But labor market dynamics need to improve to reduce unemployment sufficiently, including by further enhancing internal flexibility, reducing duality and improving active labor market policies. Policies reducing the cost (including tax cost) of employing certain groups, such as the young and low-skilled, should be considered. The labor reform should be complemented by faster progress in boosting competition and the business environment.

43. A social agreement should be explored to bring forward the employment gains from structural reforms. This could comprise: employers committing to significant employment increases (and price cuts) in return for unions agreeing to significant further wage moderation, and some fiscal incentives. The risks, however, are significant and any agreement should not stall the reform process.

44. Private sector deleveraging should be facilitated. The insolvency regime should continue to be improved, in particular, to promote early rescue of viable firms through out of court work-outs. In the future, consideration should be given to introducing a personal insolvency regime that protects payment culture and financial stability.

45. Banks also need to play their part. Losses need to be promptly recognized and distressed assets sold to avoid tying up resources. Other priorities include: continuing to reinforce the quality and quantity of capital; removing supply constraints; and implementing rigorous and regular forward-looking scenario exercises on bank resilience to guide supervisory action.

46. The required fiscal consolidation should be as gradual and growth-friendly as possible. The government’s new medium-term structural targets strike a reasonable balance between reducing the deficit and supporting growth. It will be important to detail how these targets will be achieved and to ensure the measures are as growth-friendly as possible. Progress on structural fiscal reforms, such as the fiscal council and pension reform, needs to be followed through with ambitious legislation and rigorous implementation

47. It is proposed to hold the next Article IV consultation on the regular 12-month cycle.

Figure 3.
Figure 3.

Spain: Economic Activity

Citation: IMF Staff Country Reports 2013, 244; 10.5089/9781484343180.002.A001

Sources: Bank of Spain; Eurostat; WEO; and IMF staff calculations.
Figure 4.
Figure 4.

Spain: Competitiveness

Citation: IMF Staff Country Reports 2013, 244; 10.5089/9781484343180.002.A001

Sources: Direction of Trade; Eurostat; and WEO.
Figure 5.
Figure 5.

Spain: Imbalances and Adjustment

Citation: IMF Staff Country Reports 2013, 244; 10.5089/9781484343180.002.A001

Sources: Banco de España; Instituto Nacional de Estadistica; OECD; CSO; WEO; and IMF staff calculations.1/ Household and corporate sector debt liabilities include loans, securities other than shares, and other accounts payable, including trade credit.2/ Historical average calculated over 1980-2012.
Figure 6.
Figure 6.

Spain: Financial Market Indicators

Citation: IMF Staff Country Reports 2013, 244; 10.5089/9781484343180.002.A001

Sources: Bank of Spain; Bloomberg; and IMF staff estimates.1/ Peers include Unicredit, Intesa-San Paolo, Commerzbank, Deutsche Bank, HSBC, Barclays, UBS, Credit Suisse, Societe Generale, BNP, and ING.
Figure 7.
Figure 7.

Spain: Labor Markets

Citation: IMF Staff Country Reports 2013, 244; 10.5089/9781484343180.002.A001

Sources: Eurostat; OECD; WEO; Bakker and Zeng (2013); and IMF staff calculations.1/ Calculations assume that the contribution of the construction and manufacturing sectors to unemployment in 2007-Q3 was null.
Figure 8.
Figure 8.

Spain: Credit Conditions

Citation: IMF Staff Country Reports 2013, 244; 10.5089/9781484343180.002.A001

Sources: Bank of Spain; ECB; and IMF staff calculations.1/ Interest rates on loans to new business up to 1-year maturity. Small loans are up to €1 million and large loans are above €1 million.
Figure 9.
Figure 9.

Spain: Households’ Financial Positions

Citation: IMF Staff Country Reports 2013, 244; 10.5089/9781484343180.002.A001

Sources: BdE; ECB; Haver; and IMF staff calculations.
Figure 10.
Figure 10.

Spain: Nonfinancial Corporates’ Financial Positions

Citation: IMF Staff Country Reports 2013, 244; 10.5089/9781484343180.002.A001

Sources: Bank of Spain; IMF’s corporate vulnerability utility; and Haver.1/ Includes trade credit.2/ Corporate debt-to-equity ratios are from IMF’s corporate vulnerability utility, based on firms listed in Spain and market prices. The results may be affected by valuation changes.3/ A slight decline in NPL ratios of corporate sector at end-2012 resulted from a transfer of assets to SAREB.
Figure 11.
Figure 11.

Spain: Balance of Payments

(Percent of GDP)

Citation: IMF Staff Country Reports 2013, 244; 10.5089/9781484343180.002.A001

Sources: Eurostat; WEO; Bank of Spain; and IMF staff calculations.
Table 1.

Spain: Main Economic Indicators

(Percent change unless otherwise indicated)

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Sources: IMF, World Economic Outlook; data provided by the authorites; and IMF staff estimates.

Output per worker (FTE).

Data from the BdE compiled in accordance with the IMF Balance of Payments Manual.

The headline deficit for Spain excludes financial sector support measures equal to 0.5 percent of GDP for 2011 and 3½ percent of GDP for 2012.

Table 2.

Spain: Selected Financial Soundness Indicators, 2006-2013

(Percent or otherwise indicated)

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Sources: Bank of Spain; ECB; WEO; Bloomberg; and IMF staff estimates.

Starting 2008, solvency ratios are calculated according to CBE 3/2008 transposing EU Directives 2006/48/EC and 2006/49/EC (based on Basel II). In particular, the Tier 1 ratio takes into account the deductions from Tier 1 and the part of the new general deductions from total own funds which are attributable to Tier 1.

Refers to domestic operations.

Including real estate developers.

Sum of main and long-term refinancing operations and marginal facility.

Ratio between loans to and deposits from other resident sectors.

Senior 5 years in euro.

Table 3.

General Government Operations

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Sources: Ministry of Finance; Eurostat; and IMF staff estimates and projections.