22 November 2013

IMF: Spain - Financial Sector Reform - Fourth Progress Report

Executive summary

Of note, capital-augmentation measures arising from last year’s stress test are now complete, SAREB has almost concluded its organisational development and is now accelerating the liquidation of its assets, and key reforms of Spain’s financial sector framework have been adopted or put in train. Macro-financial developments since the last progress report have been broadly positive. Output and unemployment have stabilised, with strong export growth.

The clean-up of banks’ balance sheets under the financial sector programme has significantly bolstered the system’s capital and liquidity, with all banks now having a core tier 1 capital ratio in excess of 9 per cent, except for one relatively small bank that is in the process of being taken over by a stronger bank. Profits in the first half of 2013 also exceeded assumptions in the stress test’s base case. On the other hand, profitability was boosted at least in part by temporary factors, and non-performing loans, which tend to lag changes in economic growth, are still increasing.

Against this background of mixed but broadly positive developments, Spain’s financial markets rose briskly in recent months. Despite recent improvements, important risks remain, including those associated with the ongoing macro-economic adjustment. The correction of Spain’s large external, fiscal and financial imbalances is well underway, with policy actions at both the European and Spanish levels helping to ease market pressures over the last year. Nonetheless, significant further adjustment remains. Deleveraging by households and businesses, as well as planned fiscal adjustment over the next several years, will continue to weigh on domestic demand, such that the pace of recovery is likely to be restrained, with concomitant challenges for bank profitability that could in turn slow the recovery of credit conditions, reinforcing headwinds to growth and downside risks. There is also upside potential, especially in the medium term, in a scenario of strong policies and reforms by both Spain and Europe.

Full report

In an interview on 21 November on the radio programme "Las mañanas de Radio Nacional de España", Spanish Prime Minister Mariano Rajoy said:

"We have taken difficult decisions that no-one likes to take, but they were absolutely necessary and lay solid foundations for the future, to be able to grow and create jobs, and I believe that some results are starting to be seen and that we will see even more next year, in 2014."

"I would like to say one thing: The economy, like many other things in life, cannot be fixed with one regulation, or one decree-law, or one speech; a lot of work needs to be done, many decisions need to be taken and many areas need to be seen to at the same time. But, if we don't sort out the situation of what is called the macro-economy, in other words, the public deficit, if we don't sort out the foreign trade deficit, if we don't sort out inflation and if we don't sort out the financial system, it will impossible to see anything later.

"There are already some positive figures. The risk premium, which last year recorded some astronomical figures, has gone down this year. That means that people are starting to have confidence in the Spanish economy and that has meant we have saved €6 billion in servicing debt this year alone. That is highly significant.

Will the banking bailout cost the Spanish people money?

"The banking bailout is a 10-year loan, with a 10-year grace period, in other words, nothing is paid back for 10 years and then interest of 0.5 per cent. That will then become public debt in 10 years' time, but it would have been far more expensive for us not to have concluded this operation. In other words, we would have had to pay the deposit-holders of all the financial institutions. Hence, I believe the decision taken was the right one. A country cannot survive without a financial system, and, of course, we have invested a lot less money than important countries like the United Kingdom and Germany."

Full interview © La Moncloa

© International Monetary Fund