Transcript

Transcript of a Conference Call on the Publication of the Staff Report for the 2014 Article IV Consultation with Spain

July 10, 2014

MS. GAVIRIA: Hello everyone. Welcome to this conference call on the 2014 Article IV Consultation with Spain. Let me introduce the speaker, James Daniel, Mission Chief for Spain. He'll have some opening remarks, and then he'll be happy to take your questions.

MR. DANIEL: Thank you, Angela. Good morning everybody. Good afternoon to those in Europe. Thank you for your interest in our work. You should have some documents from us: The main staff report and, at the back of that, a supplement that we issued on the tax reform. We also have what we call the Selected Issues Papers, which are the background documents to our work.

Before taking any questions let me briefly outline our four main messages. The first message is that the economy has clearly turned the corner. The recovery is well underway, and as you can see by the projections in Table 1 on page 41 in the staff report, prospects are much better than a year ago.

The second message is that this turnaround reflects the collective efforts of the Spanish society. In particular, decisive policy action is on many fronts in Spain, as well as support from Spain's European partners. For more detail on these actions see the first paragraph on page 4 in the staff report and Figure 2 on page 6.

The third message is that there is still a long way to go. The economy and living standards are still suffering from the legacy of the crisis. In particular, almost 6 million people are unemployed, most of which have been out of work for more than a year.

The fourth message is that the way to increase living standards is to continue the efforts to make this recovery as strong and long-lasting as possible. It also means making the recovery as inclusive as possible, so that it benefits all segments of society, especially the unemployed.

Now, we discuss in the staff report a range of specific priority areas that we suggest would help deliver these results. These main actions are summarized on the front page. We welcome your questions now.

QUESTIONER: Thanks very much for your comments, very interesting. I was wondering if you could give us a bit more info into your assessment of the strength or the resilience of the financial system, and how robust that might prove in the event of, for example, the potential failure of a bank in a neighboring country?

MR. DANIEL: I don't want to start speculating on what might happen in various hypothetical scenarios, but let me give you some perspective on the banking system. Spain's banking system has just come through very successfully a financial sector program where the system went through a very stringent asset quality review and stress test. In the fall of 2012 banks were recapitalized, weak banks were restructured, were resolved, their worst assets were transferred to an asset management company.

Since then banks have raised more capital, and the macro economy has been broadly positive. So I would say that the banking system has made significant progress in strengthening and being prepared for the forthcoming ECB asset quality review and stress test.

QUESTIONER: I think I'm going to ask the question that my colleague asked before. When you see the markets today everything keeps going down because of Portugal. What is happening?

MR. DANIEL: At this stage I'm only here to talk about Spain and the analysis that we've done.

QUESTIONER: I mean, the situation is pretty strange today.

MR. DANIEL: I appreciate your interest in that issue, but we don’t make day to day market commentary like that.

MR. POZZI: But the two economies are super intermitted. They are basically together.

MR. DANIEL: We're talking about Spain, and, in fact, the two economies are not that interlinked from a Spanish perspective, anyway.

QUESTIONER: I wanted to ask a little bit about fiscal reform. I think that your report was written just before the government made this announcement, but I was wondering if you could maybe give us a bit of reaction to the government's reforms. In particular, you say in your piece that Spain needs to strike the right balance between consolidating too fast and too slowly. I was wondering whether you think the government's reform can achieve that balance?

MR. DANIEL: I think you may not have seen it because it's pretty hidden. If you look in the big bundle that's called the staff report and you go all the way to the back and turn back a few pages before the press release, there is something called Spain Supplementary Information, issued on June 30. It talks about the tax reform proposal that was announced. So that does have views in it, but I'd also point to how we would assess it.

The criteria by which we would assess the fiscal reform is laid out on the three bullets on pages 26 and 27. Those are enhancing the overall revenue ratio, cutting taxes on employing the low paid, and broadening the basis of direct taxes. Those are the criteria that we have used in that supplement to assess the very initial reform.

I don’t have all the details, obviously, but those are the broad areas of reform that we have seen so far. The findings there are a preliminary assessment, as further changes are likely to be forthcoming.

The first one, getting back to your question, is that what we have seen so far is revenue losing. It's not revenue increase. It's not even revenue neutral. It's revenue losing. So that will need to be compensated by further measures in the future.

Secondly, it seems to us that there are many positive areas for employment, but maybe it could be better directed at the low paid by cutting Social Security contributions on employing them.

Thirdly, there are some very positive aspects in the reform that we've seen on broadening the basis. However, there are also some aspects of it that don't go quite so far, and the overall effect we're not clear of yet. We look forward to getting clarity on that.

QUESTIONER: Okay. One of my questions specifically was if this reform that was announced already was enough to raise tax income.

MR. DANIEL: The answer is no. I think the government itself has official estimates; the cost of this reform, as announced, is about 0.6 percent of GDP.

MS. GAVIRIA: If there are no more questions we end the conference call here. Thanks everyone for participating. Thank you, James.