Spain's Financial Crisis

8/6/2019 Spain's Financial Crisis

1/15


2/15

Agenda

Spanish Economy before the crisis

The Great Spanish Real Estate Bubble

Economic Strategy

Structural Reforms Fiscal Consolidation Strategy

Funding Strategy


3/15

Spanish Economy before the crisis

Spain economic growth continued during the term of

Prime Minister Jos Luis Rodrguez Zapatero (2004)

The new government continued with liberalization,

privatization, and deregulation of the economy

The GDP growth was robust at around 3% (Europeanstandards.)

However signs of a problem had started surfacing.

Unemployment levels, although down from the highs

of 1990s, were still at around 10%.

The inflation rates were going high and there was an

increasing family indebtness at as much as 115% on

account of rising real estate and oil prices. The

yawning Trade and Fiscal deficit was another matter of

concern.


4/15

The Great Spanish Real Estate Bubble

Spain witnessed a real estate boom starting late 90s.The property prices increased by over 80% between 1990 & 2007.

Much of the boom was fuelled by low interest rates and easyavailability of credit. The average Spaniards desire of owing ahouse was the underlying driver of this phenomenon with activegovernment encouragement.

The Real Estate sector soon came to become one ofthe most important sectors in the Spanish economy,generating employment and causing influx of migrantlaborers.

Post the worldwide economic meltdown of 2007, the

Real Estate boom collapsed.In the period 2007-2008 Spain became the worst effected country

in terms of the sharp plunge in construction sales. Actual saleswent down by 25%, causing the new constructions to come to astandstill. This further aggravated the Unemployment problemwhich rose dramatically to 21% while the rest of Europe was at9.6%.


5/15

And the burst !

Post the worldwide economic meltdown of 2007,the Real Estate boom collapsed.

In the period 2007-2008 Spain became the worst effected

country in terms of the sharp plunge in construction sales.

Actual sales went down by 25%, causing the new constructions

to come to a standstill. This further aggravated

High rates of Unemployment

The Unemployment problem which rose dramatically to

21% while the rest of Europe was at 9.6%.

Creating new jobs incredibly difficult Confronted with wage demands which are unfit for the

less modern economy.

Forced to cut jobs in order to compete, because it

cannot devalue its currency. It is running out of space to

create greater productivity

GDP - real growth

rate

2% (2008)

7% (2007)

9% (2006)


6/15

Spain today..

Over 20% of the workforce is unemployedDeficit equal to 11.4 percent of GDP

Total debt equals 270 percent of GDP

Rampant credit downgrades

Unsold housing inventory levels SIX TIMES

WORSE than America

A "green economy" that strangles two jobs for

every one it creates

Caught between austere misery and a credit

downgradeIMF forecasts NO POSITIVE GROWTH until 2011

The strikes and protests are just getting started

With the amount

of funding Spain

requires, there's no

way the current

eurozone bailout

could meet Spain'sneeds if things got

worse.


7/15

Catch 22

Caught between austere misery and a creditdowngrade

A Loose Loose situation

What ever you do will harm the economy

Onourous debt levels difficult to be serviced

Cut the government expenditure and you devastate theEconomy

Keep the same level of expenditure, you end up going

the Greece way


8/15

Banks at a glance..


9/15

What does it mean to Europe?

EUR Millions Exposure to Spain Exposure/ Tier 1Capital

Spain 203,310 113%

Germany 31,854 21%

France 6,592 4%

United Kingdom 5,916 2%

Belgium 3,530 11%

Netherlands 1,685 2%

Italy 1,383 2%

Ireland 391 2%

Portugal 345 2%

Austria 239 1%

Barclays, Deutsche

Bank, and BNP has

large estimated

exposures to

Spanish sovereigndebt.


10/15

Is Spain a dead Economy walking?

Is Spain the Iceberg all set to sink the Titanic that

is Europe ?


11/15

Governments Macroeconomic Plan

The output gap to be closed by 2013, after

peaking in 2010

External demand contribution to GDP will

gradually wane as domestic demand would

begin to gather steam

Potential growth must recover from a trough

of 0.6% in 2010 to 1.6% in 2013


12/15

Economic policy strategy for sustainable growth

Prudent Macroeconomic Scenario 2010-

2013

Agreement on Fiscal Consolidation to bring

the deficit back to 3% in 2013

Structural Reforms:

Structural Reforms in the goods markets

Public Pensions System

Residential Real Estate Sector Labour Market

Banking sector Restructuring


13/15

Fiscal Consolidation Strategy

Substantial reduction in Spending and moderateincrease in Revenues

Already in 2010 a 2.2% cut in structural deficit

Temporary measures (changes in tax collection, one offinvestment funds) account for 2.4% points of GDP in

2009s total deficit Total size of fiscal policy adjustment (structural terms):

5.7% of GDP

Restraint in wage outlays for all public administrationsthrough:

10% replacement rate No new temporary hiring

Strong moderation in wages

Sizeable cuts in investment, transfers and subsidies

Shared commitment to fiscal discipline and margin to

secure further reductions in the deficit


14/15

Highlights of Funding Strategy

Significant reduction in net funding requirements

and persistence of sound risk metrics

Liquidity, transparency and predictability will

continue as guiding principles for the execution of

our auction program

As for syndications, timing is dictated by the limit

size of the line to be replaced (16.5 bn for longer

tenors) and market conditions

Innovations for 2010: 18-month T-bills reappear,Euro inflation linker still a project

Maintain a stable and diversified investor base


15/15

Thank You

Group 11

Sandeep Deb

Purnendu Singh

Tulika Dhawan

Rahul MalikVijit

Documents

Spain's Financial Crisis