Spain’s private sector deleveraging process: Making the adjustment

Spain’s private sector deleveraging process: Making the adjustment

Fecha: 2013
Spanish and International Economic & Financial Outlook, SEFO, V. 2 N.º 5

Sumario

Advancement on Spain’s household deleveraging process
  • High private sector debt levels associated to asset price bubbles and related lending booms have made household deleveraging a common and painful consequence of financial crises in many countries. As recently pointed out by the IMF and the European Commission, deleveraging remains one of the major challenges for the Spanish economy over the next few years. In this context, this article provides an analysis of the recent evolution and prospects of household debt and financial savings rates in Spain. Spain’s private sector debt levels have increased rapidly in recent years compared to the majority of its European peers, and its financial savings rate has been negative until 2012, due to the large incurrence of liabilities. Nevertheless, our analysis reveals that although the debt reduction effort may still take some years, deleveraging seems to be accelerating recently. Funcas’ estimates for 2013 point to a continued acceleration in the deleveraging effort, permitting Spanish families to progressively increase financial savings and their net financial wealth.

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The Spanish housing market: Is the adjustment over?
  • The housing market adjustment following the bursting of the property bubble in Spain has represented a key challenge for the economy. During several years, the adjustment has largely been made through quantities rather than prices. Nevertheless, the recent evolution of house price indices shows that they are finally adjusting fast and remain on a declining path. In addition, large operations in the Spanish real estate market have helped to increase the confidence of international investors. Some key trends have also emerged in the property market, such as the presence of banks as key players in the sector, the increase in cash purchases versus reliance on external financing, and the larger role of foreign investors and foreign funds. Recent transactions by banks and Spain’s so-called bad bank the SAREB have also been promising. Despite these developments, the stock of new houses remains largely unchanged and banks continue to accumulate repossessed properties on their balance sheets. Ratios show that the Spanish property market remains overvalued, but that progress on the adjustment process is on going.

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State aid to Spain’s banking sector in the EU context
  • Many EU countries have had to provide support to their financial sectors in order to help them overcome the crisis. Between the contingent liabilities and capital injections, State aid to Europe’s banks since the start of the crisis has come to almost 1.3 trillion euros, equivalent to 10% of EU-27 GDP. State aid measures have largely taken two forms –liquidity support through guarantees and financial asset purchases, and solvency support through direct capital injections. Several countries have already seen their public deficits increase as a result of bailing out their banking sectors. Additional risks taken on in the form of contingent liabilities may add further pressures to public accounts in the years to come. In Spain, while public aid was less than in some countries and in line with the EU average, the losses, and hence impact on the public deficit, have been bigger. Moreover, Spain’s contingent liabilities are much higher than the European average. Hence, the economic recovery will be a key determinant factor in the ultimate losses incurred by the State, and thus by taxpayers, as a result of the public bank bailout.

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Progress on the second pillar of the Banking Union: The Single Resolution Mechanism
  • The existence of a Single Resolution Mechanism for banking crises would ensure the absence of any competitive distortion in this area within the single market. Its main objective would be to ensure efficient resolution, under the Single Supervisory Mechanism, of a bank that was facing serious difficulties, with minimal cost to taxpayers and the real economy. Although the EU decision process tends to be slow and complicated, it seems that over the next year, the mechanism should be operational.

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Implications of the EU-US TTIP: The largest bilateral trade agreement in history
  • The EU and the US are involved in the most ambitious trade liberalization negotiations process ever witnessed. The road ahead will necessarily require surpassing existing difficulties in a number of relevant issues foreseen on the negotiators’ agendas. The effects of reaching a free trade agreement between today’s two main economic areas are significantly positive and are estimated, in the best case scenario, to generate close to 120 billion euros per year for the European Union. Ex ante assessments of the proposed agreement show that Spain will be one of the countries to obtain the greatest welfare gains from the bilateral partnership for which negotiations have just recently begun.

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An austerity-driven energy reform
  • In July 2013, the government approved a major overhaul of the Spanish electricity sector to correct existing imbalances that have led to an exponential increase of regulated electricity costs and a huge tariff deficit. The reform addresses the problem of financial sustainability of the sector, severely affected by weak demand and overcapacity. Previous regulation introduced in 2012 and early 2013, also aimed at restoring financial stability of the sector, failed to correct the tariff shortfall and new regulatory measures were needed to reduce the 4.5 billion euros forecasted deficit for 2013. The frequent change of the rules of the game in the sector has created regulatory uncertainty, more so as it is not clear that the present reform will be sufficient to eliminate the deficit. Moreover, the government has left the door open to new regulation that would deal with the price formation system. In general, short run financial criteria have prevailed, while efficiency principles and a long run perspective have little weight in the reform.

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