## _cr09128

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### Executive summary — background, assessment, and priorities
- Spain entered a sharp downturn after funding for the housing boom dried up and a large external deficit emerged.
- Inflation is falling but remains structurally above the euro average; hourly labor cost growth is approaching 6 percent compared with 3½ percent for the euro area.
- Labor markets are adjusting with labor shedding; unemployment reached 12.3 percent in November (Eurostat).
- Banks have weathered the first impact due to strong prudential cushions, but asset quality is weakening as building companies fail, house prices decline, and unemployment rises.
- Fiscal deficit has ballooned, reflecting discretionary measures and a drop in important tax bases, including housing.
- Key structural weakness: growth must shift from housing-led expansion to a model with stronger productivity and competitiveness.
- Policy priorities:
  - Substantial structural reform in labor and product markets to boost supply and competitiveness.
  - Consolidation in the banking system is likely.
  - Fiscal policy must cushion the downturn while guarding medium-term sustainability.
  - Contingency plans required to augment bank capital if systemic pressures arise.

### Macroeconomic outlook and projections (baseline and scenario framework)
- Staff lowered its 2009 growth scenario to a range between -1 and -2½ percent with a baseline of -1.7 percent.
- Staff projects CPI inflation to drop to 0.8 percent in 2009.
- Unemployment would peak around 17 percent in 2010.
- Key indicators (percent unless noted):
  - Real GDP: 2007: 3.7; 2008: 1.2; 2009: -1.7; 2010: -0.1; 2011: 0.9; 2012: 1.4; 2013: 1.6; 2014: 2.0
  - Total domestic demand: 2007: 4.2; 2008: 0.5; 2009: -5.0; 2010: -1.4; 2011: 0.4; 2012: 1.0; 2013: 1.4; 2014: 1.8
  - Consumption: 2007: 3.8; 2008: 1.6; 2009: -0.7; 2010: -0.0; 2011: 0.3; 2012: 0.3; 2013: 0.7; 2014: 1.1
  - Fixed investment: 2007: 5.3; 2008: -2.1; 2009: -15.7; 2010: -6.1; 2011: 0.6; 2012: 3.0; 2013: 3.7; 2014: 4.1
  - Net exports (contribution): 2007: 2/ -0.8; 2008: 0.7; 2009: 3.6; 2010: 1.4; 2011: 0.6; 2012: 0.4; 2013: 0.2; 2014: 0.2
  - Exports: 2007: 4.9; 2008: 2.6; 2009: -0.4; 2010: 0.9; 2011: 1.6; 2012: 2.1; 2013: 2.5; 2014: 3.2
  - Imports: 2007: 6.2; 2008: -0.1; 2009: -11.0; 2010: -3.9; 2011: -0.4; 2012: 0.6; 2013: 1.8; 2014: 2.4
  - CPI inflation, pa: 2007: 2.8; 2008: 4.1; 2009: 0.8; 2010: 1.6; 2011: 1.5; 2012: 1.6; 2013: 2.0; 2014: 2.3
  - Unemployment rate, pa: 2007: 8.3; 2008: 11.0; 2009: 15.6; 2010: 17.0; 2011: 16.9; 2012: 16.3; 2013: 15.5; 2014: 14.4
  - Potential growth (HP-filter): 2007: 2.1; 2008: 1.8; 2009: 1.6; 2010: 1.5; 2011: 1.5; 2012: 1.6; 2013: 1.7; 2014: 1.8
  - Output gap: 2007: 4.5; 2008: 3.9; 2009: 0.4; 2010: -1.2; 2011: -1.7; 2012: -1.9; 2013: -1.9; 2014: -1.7
  - Current account balance: 2007: -10.1; 2008: -9.7; 2009: -5.5; 2010: -4.2; 2011: -3.8; 2012: -3.5; 2013: -3.3; 2014: -3.0
- Policy-relevant shock sensitivities:
  - A €10 decline in oil prices cuts Spain’s import bill by 0.8 percent of GDP annually.
  - A 100 basis point decline in the 12-month euribor saves homeowners 0.6 percent of GDP in mortgage interest payments annually.
- Balance of risks: on the downside; baseline range wide. Key uncertainties include household deleveraging (baseline assumes household saving increases by 2¼ percentage points; downside assumes saving rates jump by 3¾ percentage points), external demand, and banking-sector spillovers.

### Housing market — stock, price scenarios, and implications
- Authorities estimate stock of at least 600,000 unsold homes; private sector estimates stock of 1 million unsold homes versus demographically sustainable sales of some 400,000 homes a year.
- Staff scenario: house prices falling by 30 percent in real terms over four years (peak/trough); construction activity to bottom out at the earliest in 2010.
- Divergence in measures:
  - Official assessed value per square meter: prices now slightly down year-on-year.
  - New official series on home prices per dwelling: more substantial nominal declines.
  - Private assessors / average market asking prices: nominal home prices already falling over 10 percent y/y.
- Housing implications:
  - Slowing construction may release 1 million workers (5 percent of total employment).
  - Mortgage credit is 35 percent of loans; construction and real estate company credit another 25 percent.
  - Staff cautioned against constructing more subsidized housing at this time.
- Policy recommendations:
  - Activate and liberalize the rental market (relax landlord’s automatic renewal obligation during the initial five years and caps on rent increases at CPI indexation).
  - Facilitate mortgage refinancing, limit foreclosures, and promote rental market and targeted assistance.
  - Improve eviction rules and mediation.

### Banking sector — buffers, pressures, support measures, and contingency planning
- Strengths and buffers:
  - Prudent regulation, sound supervision, cautious retail-oriented models.
  - Dynamic loan-loss provisioning built buffers estimated at €24 billion (about two years worth of cushion).
  - NPL-coverage ratios at peak were over 200 percent versus EU average just over 60 percent (Actualizado Circular 6/2008).
- Key banking indicators (percent unless noted):
  - Return on equity: 2005: 16.8; 2006: 19.6; 2007: 19.7; 2008: 16.8
  - Return on assets: 2005: 0.9; 2006: 1.0; 2007: 1.1; 2008: 1.0
  - Operating expense/gross income: 2005: 49.1; 2006: 41.9; 2007: 43.4; 2008: 47.1
  - CAR: 2005: 12.0; 2006: 11.9; 2007: 11.4; 2008: 11.3
  - Tier 1: 2005: 8.2; 2006: 7.6; 2007: 7.9; 2008: 8.2
  - Leverage (unweighted book-value capital/asset ratio): 2005: 6.0; 2006: 6.0; 2007: 6.3; 2008: 5.9
  - Deposits/loan ratio: 2005: 80.4; 2006: 79.7; 2007: 78.8; 2008: 78.1
  - Liquid/total asset ratio: 2005: 34.1; 2006: 29.7; 2007: 29.2; 2008: 28.6
  - NPL ratio: 2005: 0.8; 2006: 0.7; 2007: 0.9; 2008: 3.2
  - Impaired loan coverage ratio: 2005: 255.5; 2006: 272.2; 2007: 214.6; 2008: 171.9
- Emerging pressures:
  - Funding vulnerability concentrated on wholesale funding with forthcoming debt amortizations of about €170 billion in the next two years.
  - Credit growth slowed from 25 percent y/y in early 2007 to 7 percent in late 2008.
  - With 98 percent of mortgages indexed to the 12-month euribor, debt servicing costs first increased after mid-2007 before easing sharply in late 2008.
- Authorities’ stance and measures:
  - Focus on assisting bank funding rather than purchasing assets or injecting capital; legal provisions adopted for potential capital support as contingency.
  - Deposit insurance limit raised from €20,000 to €100,000.
  - A €30–50 billion fund established to purchase high-quality securities issued by credit institutions (FAAF) with maturities up to 3 years; up to 25 percent of a tender may be allocated through noncompetitive bids.
  - Government guarantees for new debt issues: amount approved is €100 billion to be used by mid-December 2009; a possible additional €100 billion might be allotted in 2009 if market conditions do not improve; pricing minimum of 50 basis points plus a factor depending on CDS spreads and/or rating.
  - Possible recapitalization via acquisition of nondiluting instruments such as preferred shares if necessary.
- Staff views and stress tests:
  - Staff stress tests suggest banks may face capital needs; Bank of Spain’s internal results are more benign but authorities are not complacent.
  - Staff noted need for fiscal contingency plans to assist bank capital if systemic pressures materialize.
- Savings banks (cajas):
  - Regional concentration and heavy exposure to construction; NPLs higher than commercial banks.
  - Staff recommends consolidation and greater use of participating capital shares; simplification of participation share regulations.

### Box 2 — Bank Support Measures (highlights)
- Deposit insurance limit raised from €20,000 to €100,000; deposit information system strengthened.
- FAAF established (€30–50 billion) to purchase high-quality securities; auctions conducted with up to 3-year maturities; four auctions carried out with positive results.
- Government guarantees for new debt issues: €100 billion approved to mid-December 2009; possible additional €100 billion in 2009.
- Recapitalization if necessary may use government acquisition of nondiluting instruments (preferred shares).
- Recent 2009 outlook: balance-sheet restructuring, likely bank consolidation, impaired loans jumped, CDS spreads widened, bank share prices dropped.
- Santander and BBVA took private measures: Santander placed €7.2 billion in new shares in November; BBVA placed over €1 billion in preferred shares in December and a similar amount in bonds in early January.

### Competitiveness indicators, constraints, and reform recommendations
- Competitiveness gap estimates:
  - Measures based on relative consumer prices and unit labor costs point to an appreciation of 12–21 percent over Spain’s long-run averages.
  - CGER-based gap estimates indicate 11–22 percent.
  - Figure 15 highlights: REER-CPI based gap: 12%; REER-ULC based gap: 21%; Estimates of Competitiveness Gap 1/ (percent): Macro Balance Approach 2/10.7; NFA Stabilizing (External Sustainability)17.2; Equilibrium Exchange Rate (EREER)21.8
- Constraints: in the currency union, Spain cannot devalue; adjustment requires labor and product market reforms.
- Labor market reform priorities:
  - Cut wage indexation to reduce the inflation differential with the euro area.
  - Invoke opt-out clauses earlier in collective wage bargaining to preserve jobs.
  - Reduce labor market segmentation by equalizing dismissal costs of temporary and permanent contracts at a low level.
  - Staff additionally recommends urgent wage moderation; authorities favor productivity-led reductions in unit labor costs and improved job matching.
- Product market reform priorities:
  - Ambitious transposition of the Services Directive, reduce administrative burdens, improve competition in professional services, reform network industries, and ensure electricity prices recover costs in contested and unbundled markets.
  - Simulations cited: ambitious Services Directive transposition could reduce margins by an average of 3¾ percent and lift potential GDP by 1¼ percent in the steady state versus no reform; OECD simulations suggest productivity growth could increase by close to 1 percent if product market regulation matched less restrictive countries.

### Fiscal policy appraisal, public finances, and recommendations
- Fiscal developments:
  - General government balance switched from moderate surpluses to sizeable deficits; interest bonus from EU integration lowering costs by over 3 percent of GDP is no longer helping.
  - Fiscal indicators show revenue slumping together with housing and primary expenditure accelerating; debt has bottomed out and risen.
- Baseline general government operations (billions of euros / percent of GDP):
  - Revenue (billions): 431.1 (2007), 405.7 (2008), 397.4 (2009), 402.8 (2010), 417.0 (2011), 434.1 (2012), 455.1 (2013), 480.8 (2014)
  - Primary balance (billions): 40.1, -16.6, -48.0, -44.3, -32.5, -20.5, -8.6, 2.6
  - Overall balance (billions): 23.3, -33.8, -66.6, -65.8, -56.5, -46.8, -36.8, -27.1
  - General government balance (percent of GDP): -0.5, -0.2, -0.3, 1.0, 2.0, 2.2, -3.1, -6.1
  - Government debt: 36.2, 38.6, 48.6, 53.8, 56.8, 55.6, 56.6, 56.3
- Staff recommendations:
  - Fiscal measures should cushion the downturn but be clearly embedded in a long-run sustainability framework and spelled out to strengthen confidence.
  - Further fiscal impulse only if necessary and linked to structural reforms to minimize social costs.
  - Publish an intertemporal public sector balance sheet in the annual budget.
  - Pension and other long-term fiscal reforms necessary to dampen aging costs and secure confidence.

### Public sector balance sheet and external-debt dynamics (selected)
- International Investment Position (EUR bn): -298 (2003), -436 (2004), -505 (2005), -668 (2006), -826 (2007), -867 (2008)
- External debt (percent of GDP) — baseline: 88.4 (2003), 96.4 (2004), 114.0 (2005), 127.2 (2006), 134.5 (2007), 138.6 (2008), 144.6 (2009), 149.0 (2010), 153.3 (2011), 156.6 (2012), 159.4 (2013)
- Gross external financing need (percent of GDP): 35.9, 43.4, 49.6, 60.4, 59.6, 63.6, 78.4, 77.6, 78.5, 79.8, 80.8 (series by year as presented).

### Staff synthesis and urgency (key messages)
- Spain needs both cyclical support and substantial reforms after 15 years of housing-led growth and accumulated imbalances.
- Essential actions:
  - Reforms that cut costs and improve productivity since Spain cannot devalue its currency.
  - Simultaneous, strong implementation of product and labor market reforms to deflate margins and lower costs.
  - Elimination of wage indexation, earlier opt-out clauses from bargaining contracts, reduction in segmentation between fixed-term and full-time contracts, and equalization of dismissal costs at a low level to boost hiring and mobility.
- Contingency planning: prepare worst-case scenarios for fiscal and bank-capital support if downside risks materialize.

### Recommendation on consultation cycle
- It is recommended that Spain remain on the 12-month Consultation cycle.

### Spain: Fund relations and mission details (selected)
- Joined: September 15, 1958.
- Quota: 3,048.90 SDR Million (100.00 percent of Quota).
- Fund holdings of currency: 2,626.61 SDR Million (86.15 percent of Quota).
- Staff team visited Madrid on November 28–December 9, 2008; mission head B. Traa; team included K. Honjo, M. Moreno-Badia, C. Henn (all EUR), and A. Giustiniani (MCM).
- Supplementary updates approved March 6, 2009:
  - Q4 2008 growth: -1.0 percent (Q/Q) vs -0.7 percent projected.
  - Staff projected 2009 growth could be as low as -3.0 percent (update vs -1.7 percent in staff report).
  - February CPI inflation: 0.7 percent (Y/Y).
  - Last quarter of 2008 unemployment rate: 13.9 percent; staff projection: unemployment could peak at over 19 percent of the workforce in 2010.
  - Staff projected a 2009 fiscal deficit of 7½ percent of GDP; authorities increased 2008 deficit estimate to 3.8 percent of GDP.
  - Banking system impaired loans risen to 3½ percent; loan-loss-provision coverage declined to 70 percent (from above 200 percent as of end-2007).

*Source: _cr09128 — IMF staff report excerpt and annexes.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Background and immediate assessment
- Spain has entered a sharp downturn following the drying up of funding for the housing boom and a large external deficit.
- Inflation is falling but remains structurally above the euro average.
- Labor markets are adjusting with labor shedding; unemployment reached 12.3 percent in November (Eurostat).
- Banks have weathered the first impact of tighter funding conditions and weaker asset quality owing to strong prudential cushions, but asset quality is weakening as building companies fail, house prices decline, and unemployment rises.
- The fiscal deficit is ballooning, reflecting discretionary measures and a drop in important tax bases, including housing.
- Key structural weakness: growth must shift from housing-led expansion to a model with stronger productivity and competitiveness.

### Challenges and priorities
- The economy needs substantial structural reform in labor and product markets to boost supply and improve competitiveness.
- Consolidation in the banking system is likely.
- Fiscal policy must both cushion the downturn and guard medium-term sustainability.
- Contingency plans are required to augment bank capital if systemic pressures arise despite strong prudential policies and credibility.

### Staff views and recommended approach
- The large fiscal effort is helping to offset the drop in private demand.
- Measures should focus not only on demand support but also facilitate substantial structural reform in labor and product markets to boost supply and competitiveness.
- Plans to achieve fiscal sustainability should be spelled out to strengthen confidence.
- Prudential banking policies are strong, but contingency plans to augment bank capital are needed if systemic pressures materialize.

### Authorities’ views (as reported)
- The fiscal effort is commensurate with the size of the downturn; if the recession worsens, more assistance may be needed.
- The banking system needs support with funding but does not need, at this stage, more capital.
- Lower unit labor costs are to be pursued through increased productivity and better job matching, not through wage moderation, given lower average wages than in EU partners.
- Product and service market reforms are underway as agreed with EU partner countries.

### Context and recent developments (selected findings and indicators)
- Spain was a growth leader for nearly 15 years until 2008; drivers included peseta devaluations in the early 1990s, EU integration, euro adoption, swelling immigration, rising incomes, and easy funding that permitted a housing boom.
- Macroeconomic indicators (average 1993-2007) vs. Euro area 1/: Per-Capita GDP growth 2.2 1.7; CPI inflation 3.3 2.2; Unemployment rate 15.4 8.4; CA deficit (percent of GDP) -3.6 0.3. (Source: WEO. 1/ Excluding Spain.)
- Sustainability weakened as growth became increasingly dependent on importing labor and capital; productivity growth weakened as structural reforms lagged; expansion centered on nontradables; households and companies became highly indebted; current account deficit reached 10 percent of GDP by 2007.
- The global liquidity squeeze in mid-2007 triggered an abrupt unwinding: funding for the external deficit reduced and a major housing bust began; construction activity collapsed, banks faced pressure, foreign demand faltered, and competitiveness was weak.
- Political response: government increased fiscal spending, assisted bank funding, initiated product market reforms, and improved job matching and active labor market policies; opposition preferred tax cuts and increased financing for SMEs.
- By end-2008 downside risks accumulated as monthly indicators worsened: housing, industrial activity, and durable goods were most affected.
- Bank funding tightened again after the collapse of Lehman Brothers and continued losses in some large European banks.
- Credit growth slowed sharply from 25 percent y/y in early 2007 to 7 percent in late 2008.
- With 98 percent of mortgages indexed to the 12-month euribor, debt servicing costs first increased after mid-2007 before easing sharply in late 2008.
- Collective bargaining wages were rising at 3½ percent; many contracts added retroactive compensation when prices rose above a limit.
- Hourly labor cost growth is approaching 6 percent, compared with 3½ percent for the euro area as a whole.
- The external current account deficit has started to improve, led by falling imports as domestic demand contracts; net factor payments continue to worsen with the lower IIP.
- The general government balance has switched from moderate surpluses to sizeable deficits; central government is relatively small with subnational governments accounting for 2/3s of spending; social security accounts have a current surplus but an actuarial deficit.
- The interest bonus from EU integration, lowering costs by over 3 percent of GDP, is no longer helping.

### The outlook (framework for scenario analysis)
- The outlook is somber; staff and the authorities analyze a range around a baseline scenario.
- Downside forces: deleveraging, global economic events, weak competitiveness, and pressures on bank funding and asset quality.
- Upside developments: recent sharp drop in oil prices and euribor rates, and authorities’ large fiscal efforts.

### Fiscal and financial sector risks (selected indicators and implications)
- Fiscal indicators show revenue slumping together with housing and primary expenditure accelerating again; debt has bottomed out.
- Banks have used prudential cushions but lower asset returns and higher funding costs are reducing profitability.
- Contingent need for additional bank capital if systemic pressures arise, despite current assessment that immediate recapitalization is not required.

*Source: _cr09128 - EXECUTIVE SUMMARY.*

### 12.      The staff has lowered its 2009 growth scenario further to a range between -1 and

### _cr09128 - 12.      The staff has lowered its 2009 growth scenario further to a range between -1 and

### Macroeconomic outlook and projections
- Staff lowered its 2009 growth scenario to a range between -1 and -2½ percent with a baseline of -1.7 percent.
- During the mission, staff had presented a baseline of (at least) -1 percent, but subsequent data indicate worsening conditions with a rebalancing from domestic demand to net exports while foreign demand is weak.
- Staff projects inflation to drop to 0.8 percent in 2009.
- Unemployment would peak around 17 percent in 2010.
- Indicators and baseline medium-term projections (percent unless noted):
  - Real GDP: 2007: 3.7; 2008: 1.2; 2009: -1.7; 2010: -0.1; 2011: 0.9; 2012: 1.4; 2013: 1.6; 2014: 2.0
  - Total domestic demand: 2007: 4.2; 2008: 0.5; 2009: -5.0; 2010: -1.4; 2011: 0.4; 2012: 1.0; 2013: 1.4; 2014: 1.8
  - Consumption: 2007: 3.8; 2008: 1.6; 2009: -0.7; 2010: -0.0; 2011: 0.3; 2012: 0.3; 2013: 0.7; 2014: 1.1
  - Fixed investment: 2007: 5.3; 2008: -2.1; 2009: -15.7; 2010: -6.1; 2011: 0.6; 2012: 3.0; 2013: 3.7; 2014: 4.1
  - Net exports (contribution): 2007: 2/ -0.8; 2008: 0.7; 2009: 3.6; 2010: 1.4; 2011: 0.6; 2012: 0.4; 2013: 0.2; 2014: 0.2
  - Exports: 2007: 4.9; 2008: 2.6; 2009: -0.4; 2010: 0.9; 2011: 1.6; 2012: 2.1; 2013: 2.5; 2014: 3.2
  - Imports: 2007: 6.2; 2008: -0.1; 2009: -11.0; 2010: -3.9; 2011: -0.4; 2012: 0.6; 2013: 1.8; 2014: 2.4
  - CPI inflation, pa: 2007: 2.8; 2008: 4.1; 2009: 0.8; 2010: 1.6; 2011: 1.5; 2012: 1.6; 2013: 2.0; 2014: 2.3
  - Unemployment rate, pa: 2007: 8.3; 2008: 11.0; 2009: 15.6; 2010: 17.0; 2011: 16.9; 2012: 16.3; 2013: 15.5; 2014: 14.4
  - Potential growth (HP-filter): 2007: 2.1; 2008: 1.8; 2009: 1.6; 2010: 1.5; 2011: 1.5; 2012: 1.6; 2013: 1.7; 2014: 1.8
  - Output gap: 2007: 4.5; 2008: 3.9; 2009: 0.4; 2010: -1.2; 2011: -1.7; 2012: -1.9; 2013: -1.9; 2014: -1.7
  - Current account balance: 2007: -10.1; 2008: -9.7; 2009: -5.5; 2010: -4.2; 2011: -3.8; 2012: -3.5; 2013: -3.3; 2014: -3.0
- Policy-relevant shock sensitivities:
  - A €10 decline in oil prices cuts Spain’s import bill by 0.8 percent of GDP annually.
  - A 100 basis point decline in the 12-month euribor saves homeowners 0.6 percent of GDP in mortgage interest payments annually.

### Balance of risks and scenario assumptions
- Balance of risks around the staff baseline is on the downside; the forecast range is wide.
- Key drivers of uncertainty:
  - Household deleveraging: baseline assumes household saving increases by 2¼ percentage points; upside assumes a smaller increase; downside assumes saving rates jumping by 3¾ percentage points.
  - External demand: 2009 import volumes from euro-area partners projected to drop between 1.5–2 percent.
  - Slowdown in Latin America and other markets may feed back through interlinkages of Spain’s large banks, worsening domestic credit conditions.
  - High unemployment and extended slow growth could put pressure on domestic banks and slow credit growth further.
- Without structural reforms to increase flexibility, risk of an L-shaped extended-adjustment equilibrium is a concern (experience cited: Portugal, Germany, and Japan).

### Housing market: adjustment, indicators, and implications
- Authorities estimate stock of at least 600,000 unsold homes, expected to increase somewhat as new units are finished.
- Private sector estimates stock of 1 million unsold homes versus demographically sustainable sales of some 400,000 homes a year.
- Staff scenario: house prices falling by 30 percent in real terms over four years (peak/trough); construction activity to bottom out at the earliest in 2010.
- Divergence in house price measures:
  - Official assessed value per square meter: prices now slightly down year-on-year.
  - New official series on home prices per dwelling: showing more substantial nominal declines.
  - Private assessors / average market asking prices: nominal home prices already falling over 10 percent y/y.
- Housing market implications:
  - Higher unemployment: slowing construction may release 1 million workers (5 percent of total employment).
  - Pressure on banks: mortgage credit is 35 percent of loans; construction and real estate company credit another 25 percent.
  - Weaker public finances: escalated asset prices and transactions previously lifted revenue; estimates of sustainable revenues and the structural fiscal position viewed as too optimistic by staff.
- Authorities’ measures to assist the construction sector: creating jobs (including public infrastructure), facilitating mortgage refinancing, limiting foreclosures, promoting the rental market, and expanding subsidized housing.
- Staff recommendations and cautions on housing policy:
  - Rental market underdeveloped; relax restrictions such as landlord’s obligation to automatically renew the lease during the initial five years and caps on rent increases at CPI indexation.
  - Eviction rules are being clarified and mediation revamped.
  - Staff cautioned against constructing more subsidized housing at this time, as it adds to supply and may not reach intended vulnerable groups.

### Banking sector: resilience, pressures, and policy response
- Strengths and buffers:
  - Prudent regulation, sound supervision, and cautious retail-oriented business models.
  - Dynamic loan-loss provisioning built buffers estimated at €24 billion (about two years worth of cushion).
  - Banks avoided large exposures to opaque structured products; consolidation rules reduced off-balance-sheet incentives.
- Key banking indicators (percent unless noted):
  - Return on equity: 2005: 16.8; 2006: 19.6; 2007: 19.7; 2008: 16.8
  - Return on assets: 2005: 0.9; 2006: 1.0; 2007: 1.1; 2008: 1.0
  - Operating expense/gross income: 2005: 49.1; 2006: 41.9; 2007: 43.4; 2008: 47.1
  - CAR: 2005: 12.0; 2006: 11.9; 2007: 11.4; 2008: 11.3
  - Tier 1: 2005: 8.2; 2006: 7.6; 2007: 7.9; 2008: 8.2
  - Leverage (unweighted book-value capital/asset ratio): 2005: 6.0; 2006: 6.0; 2007: 6.3; 2008: 5.9
  - Deposits/loan ratio: 2005: 80.4; 2006: 79.7; 2007: 78.8; 2008: 78.1
  - Liquid/total asset ratio: 2005: 34.1; 2006: 29.7; 2007: 29.2; 2008: 28.6
  - NPL ratio: 2005: 0.8; 2006: 0.7; 2007: 0.9; 2008: 3.2
  - Impaired loan coverage ratio: 2005: 255.5; 2006: 272.2; 2007: 214.6; 2008: 171.9
- Emerging pressures and adjustments:
  - Financial market disruption has affected banks’ operating models; balance sheet restructuring underway.
  - Liability side: intensified competition for deposits, stepped up recourse to the ECB (with another run-up at end-2008), and use of government funding assistance.
  - Asset side: slowed lending to the euro-area average growth rate, sale of industrial participations, tightened credit standards, and workouts with distressed property developers.
  - Funding vulnerability: authorities view Spanish vulnerability as concentrated on the funding side—especially wholesale funding with forthcoming debt amortizations of about €170 billion in the next two years.
- Authorities’ policy stance:
  - Measures to assist bank funding rather than purchasing bank assets or injecting capital.
  - Legal provisions adopted for potential capital support as contingency.
  - Authorities have refrained from capital injections so far, preferring private sector market-based solutions to avoid distorting competition.
  - Increased deposit insurance together with EU partners to assist confidence.
- Boxed description of prudential framework:
  - Dynamic loan-loss provisioning: banks required to create specific and general provisions; general provisions based on six risk categories and provisioning coefficients; limits on total stock of general provisions set between 0 and 125 percent of bank exposures multiplied by respective provisioning coefficients with an indicative minimum level of 10 percent (Actualizado Circular 6/2008).
  - Estimated €24 billion in provisioning cushions resulted in NPL-coverage ratios of over 200 percent at the peak versus EU average just over 60 percent.
  - Securitization and consolidation practices: stricter consolidated accounting under IFRS reduced incentives for off-balance-sheet securitization and capital relief.

### Policy discussions and reform priorities
- Consensus themes from discussions:
  - Housing market stabilization is necessary to bolster bank asset quality.
  - Banks need funding access and sufficient capital to manage crisis effects.
  - Fiscal policy is providing liquidity and propping up activity and employment, but measures should be calibrated within a long-run sustainability framework to assure a return to lower debt and boost confidence.
  - Structural reforms need to complement cyclical-support policies by lowering costs and increasing productivity to raise growth potential.
- Political economy:
  - Several interlocutors noted the political system was not focused on the long-run; support for reforms uneven, especially for labor reforms.
- Authorities’ view on recovery:
  - Authorities expect a more V-shaped recovery, citing higher population dynamics (immigration) relative to trading partners and Spain’s attractiveness as a residential destination for many Europeans supporting the housing market.
  - Authorities emphasize output market reforms to assist productivity, with less emphasis on labor market reform.
- Staff concerns and recommendations:
  - Need for further reforms to increase flexibility to avoid protracted low-growth equilibrium.
  - Complement cyclical support with product and labor market reforms to raise productivity and growth potential.
  - In housing policy, expand rental market flexibility, avoid adding supply via more subsidized housing at this time, and improve mediation and eviction frameworks to balance homeowner protection and market functioning.

*Source: IMF staff report content provided in the supplied PDF excerpt.*

### Box 2. Bank Support Measures

### Box 2. Bank Support Measures

### Official bank support measures implemented
- The limit on deposit insurance was raised from €20,000 to €100,000. Moreover, the deposit information system was strengthened to allow a timely response in emergencies.
- A €30–50 billion fund was established to purchase high-quality securities issued by credit institutions (FAAF).  
  - The auctions are modeled after, and complement, the ECB liquidity facilities, but with longer maturities up to 3 years.  
  - Up to 25 percent of a tender may be allocated through noncompetitive bids to credit institutions in proportion to their contribution to credit growth. Limits have been envisaged to safeguard sufficient diversification in allocation among institutions.  
  - Four auctions have been carried out with positive results in allocated amounts and spreads.
- Government guarantees are provided for credit institutions’ new debt issues.  
  - The amount approved is €100 billion to be used by mid-December 2009. A possible additional €100 billion might be allotted in 2009 if market conditions do not improve.  
  - Pricing is agreed with EU partners as a minimum of 50 basis points plus a factor that depends on the CDS spreads and/or the rating of the originator. Many banks will participate in this program.
- If necessary, credit institutions’ recapitalization may be carried out through the government’s acquisition of nondiluting instruments such as preferred shares.

### Recent developments and vulnerabilities (2009 outlook)
- 2009 expectations and balance-sheet pressures:
  - Spanish banks face a very difficult year, likely leading to bank consolidation.
  - Balance sheet restructuring is contributing to the slowdown.
  - Several large real-estate developers have filed for bankruptcy.
  - Impaired loans have jumped, although from a very low base, eroding prudential cushions.
  - CDS spreads have widened (sometimes a thinly traded indicator) and bank share prices have dropped, reflecting prospects of continued economic weakness and in property markets.
- Staff stress-test findings and authorities’ view:
  - Staff stress tests based on published data suggest that banks may face capital needs—Bank of Spain’s results, using detailed internal data, are more benign, but the authorities are not complacent.
  - Staff assumes significant pressures will still build on profits and asset quality in 2009 as the housing and growth downturn unfold.
  - Staff noted a need for (fiscal) contingency plans to assist banks with capital.
  - Authorities viewed the severe scenario by staff as too pessimistic, especially regarding the assumption of loan impairments rising rapidly to double digit NPL-ratios, because:
    - The authorities envisage a somewhat smaller downturn and housing price decline than staff.
    - Regulations for loan impairment have been tightened relative to the early 1990s, which results in higher NPL statistics for any given economic scenario today relative to the early 1990s.
    - Authorities considered staff assumptions on loss given default (LGDs) too high in comparison with historical experience for some loan categories.
    - Authorities considered staff had depressed the interest margin for bank earnings too much (it had remained stable so far).
    - Authorities emphasized that average loan-to-value ratios in mortgage lending were moderate, and households were responsible for the debt not just with the property but also with their income; loss experience in home lending had always been moderate and more closely tied to unemployment than falling home prices.

### Supervisory and contingency actions
- Bank of Spain actions and supervisory stance:
  - The Bank of Spain has stepped up its surveillance and the authorities are prepared to act as needed to forestall systemic disruptions.
  - Both off-site analysis (stress testing and liquidity monitoring) and on-site examinations have been reinforced.
  - Supervisors share staff concern about property developers and have followed a conservative approach to banks’ debt-to-equity (property) swaps with ailing real estate companies, requiring the buildup of adequate capital and provision buffers.
- Contingency planning:
  - Authorities agreed that increased pressures will still come and reiterated readiness to act, including fiscal contingency plans to assist banks with capital if needed.

### Savings banks (cajas) and system structure
- Structural features and vulnerabilities:
  - Savings banks (cajas) have regional concentration and particular exposure to construction.
  - NPLs in cajas are higher than for commercial banks, with some cajas in better shape than others.
  - Staff believes some consolidation is inevitable to keep the caja system functioning robustly and to avoid large fiscal costs down the line.
- Progress and recommendations:
  - Following staff’s previous recommendations for more market exposure, cajas have made progress with one institution issuing participation shares in mid-2008. The downturn in the stock market has hindered further issuance.
  - Staff recommended that cajas continue attempts to bolster capital, as market conditions permit.
  - Staff recommended simplifying regulations of participation shares to make them more attractive to investors—especially regarding overly complex dividend payout rules.
  - The 2006 FSAP had recommended allowing cajas to issue capital instruments with voting rights, and eliminating the requirement for regional governments to approve mergers of cajas. Authorities do not perceive these elements as major stumbling blocks today and would focus on immediate needs; discussions on consolidation were underway and expected to continue, facilitating interregional mergers.
  - Representatives of cajas noted these had never caused a systemic disturbance and that no caja has ever failed, though weaker ones have been absorbed through mergers.

### Large internationally active banks (Santander and BBVA)
- Risk profile and actions:
  - Santander and BBVA are international players and could face some risks from abroad.
  - Their profits have remained high so far; global diversification focused on relatively safe traditional retail banking has been an element of strength.
  - Mexico, Brazil, and Chile are key markets with their own pressure points; banks were responding with dedicated adjustments.
  - Santander expanded its retail banking model in the US and UK and is cutting costs in these ventures to improve profitability and reduce risks.
  - Santander placed €7.2 billion in new shares in November (at the height of the crisis) to bolster its Tier 1 capital base, without government assistance.
  - BBVA placed over €1 billion in preferred shares in December, and a similar amount in bonds in early January, also without government assistance.
  - Both banks were hit by the Madoff scandal, but direct exposures are small.
  - Authorities were closely monitoring potential spillovers from foreign markets into Spain via the large banks through close cross-border cooperation with EU, US, and Latin-American supervisors.

*Source: _cr09128 - Box 2. Bank Support Measures*

### 40.      Indicators suggest a competitiveness gap. Measures based on relative consumer

### _cr09128 - 40.      Indicators suggest a competitiveness gap. Measures based on relative consumer

### Competitiveness indicators and estimated gaps
- Measures based on relative consumer prices and unit labor costs point to an appreciation of 12–21 percent over Spain’s long-run averages.
- Additional staff estimates based on the CGER methodologies indicate a gap of 11–22 percent.
- Staff note these findings signal impaired competitiveness (Figure 15).
- Figure 15 highlights:
  - REER-CPI based gap: 12%
  - REER-ULC based gap: 21%
  - Estimates of Competitiveness Gap 1/ (percent): Macro Balance Approach 2/10.7; NFA Stabilizing (External Sustainability)17.2; Equilibrium Exchange Rate (EREER)21.8

### Constraints of currency union and implications for adjustment
- Under currency union, improving competitiveness will take time; Spain cannot devalue the currency to bolster competitiveness.
- Rather than repressing demand, preference is for labor and product market reforms to cut costs and reallocate resources to more productive uses for a vigorous recovery.
- Authorities point to technological upgrade of exports and increasing specialization in high value-added services as evidence of some restructuring, but rapid import penetration signals some lack of competitiveness in domestic markets.

### Labor market reform recommendations and issues
- Ambitious labor and output market reforms need to be implemented jointly to avoid income shifts and accrue benefits through improved productivity and lower costs.
- Labor reform priorities (as summarized in the document):
  - Cut wage indexation to reduce the inflation differential with the euro area.
  - Invoke opt-out clauses earlier in collective wage bargaining agreements to preserve jobs and prevent companies from declaring bankruptcy.
  - Reduce labor market segmentation by equalizing dismissal costs of temporary and permanent contracts at a low level to boost hiring and mobility and allow better trained young cohorts to move more quickly from fixed-term to better-paid permanent jobs.
- Staff additional recommendations:
  - Allow opt-out clauses in collective labor agreements to be invoked earlier than is now the case, because many companies cannot recover once they get close to bankruptcy resulting in a loss of all jobs (Figure 16).
  - Urgent wage moderation is needed to lower costs, though there is no consensus.
- Authorities’ favored approach:
  - Focus on microeconomic adjustments to reduce unit labor costs by boosting productivity (denominator) rather than wage moderation (numerator).
  - Improve job intermediation, including with private firms, and boost the effectiveness of active labor market policies.
  - Improve education where test scores are below the EU average and dropout rates are high; staff welcome these efforts but note they will require time and seem peripheral to the immediate competitiveness and unemployment challenge.
- Labor market indicators (Figure 16) emphasize:
  - Temporary employment prevalence to pre-empt high dismissal costs.
  - Small regional wage differentiation despite wide unemployment differences.
  - Low returns to education and high drop-out rates; younger cohorts are better educated.

### Product market reform recommendations and scope
- Authorities are proceeding with product market reforms aiming to:
  - Transpose the Services Directive.
  - Reduce administrative burdens.
  - Improve competition in professional services.
  - Reform network industries.
- Specific goods and services market recommendations (Spain: Structural Reform Needs):
  - Liberalize services through an ambitious transposition of the European Services Directive; regional authorities need to ensure effective implementation.
  - Eliminate restrictions to competition in professional services.
  - Reform network industries to improve competition; electricity prices should recover costs in contested and unbundled markets.
  - Reduce administrative burdens.
- Note: Well-entrenched groups oppose parts of these reforms, so ambitious rather than piecemeal implementation is crucial.
- Supporting evidence:
  - Product market restrictions are at or above those of the OECD average (Figure 18).
  - Simulations cited by authorities: an ambitious implementation of the Services Directive could reduce margins by an average of 3¾ percent and lift potential GDP by 1¼ percent in the steady state compared with a no-reform scenario; separate OECD simulations suggest productivity growth could increase by close to 1 percent in Spain if product market regulations matched less restrictive countries.

### Macro-financial context, housing, and banking sector
- Economic outlook and risks:
  - Indicators suggest a substantial downturn in 2009 driven by deleveraging and external weakness.
  - High private debt and weak external competitiveness cause long adjustments.
  - Because risks are on the downside, contingency planning should include a worse-case scenario of even weaker growth, while specifying how to secure fiscal sustainability (a V-shape for the fiscal balance).
- Housing sector:
  - The housing sector correction is underway but will take time; new homes are still coming on the market, pressuring home prices.
  - Policies to activate the rental market are welcome.
  - Mortgage assistance to newly unemployed workers can help limit foreclosures.
  - Building more subsidized homes is inadvisable as it adds to inventory and does not always benefit intended recipients.
- Banking sector assessment:
  - Banks have held up well so far, aided by government assistance, dynamic provisioning, and rigorous treatment of off-balance sheet vehicles.
  - NPLs are increasing rapidly and high reliance on wholesale markets makes funding the Achilles' heel of the banking system.
  - Measures to assist funding (FAAF and bank debt guarantees) are large, have appropriate sunset clauses, and their pricing is agreed with EU partners.
  - Banks need to allocate credit without political interference.
  - Authorities have legal provisions to support banks with capital assistance as contingency, but prefer market-based solutions to avoid distortions; capital injections should be used if systemic pressures arise.
  - Cajas vulnerabilities:
    - High dependence on local real estate activity makes cajas vulnerable; some consolidation and greater acceptance of interregional mergers would be helpful.
    - Cajas are encouraged to issue more participating capital shares as conditions permit.
  - Two large banks:
    - Resilience has been impressive with strong, diversified retail franchises, but no room for complacency.
    - Tight cooperation with EU, US, and Latin-American supervisors remains crucial.

### Fiscal policy appraisal and recommendations
- Fiscal stance and reforms:
  - Fiscal policies have been bold, with large structural measures and automatic stabilizers resulting in a sharply weaker fiscal position.
  - Shortcoming: measures have not achieved structural reforms to increase growth potential and thus ward off the possibility of an L-shaped stagnation.
  - Further fiscal impulse—only if necessary, and in cooperation with EU partners, or to assist banks—should be linked to structural reforms to minimize social costs.
- Long-run context and communication:
  - Fiscal policies need embedding in a long-run context to explain how policies can be made sustainable; this could strengthen confidence and limit increases in risk spreads.
  - As a communication device, authorities should publish an intertemporal public sector balance sheet in the annual budget, showing the debt already incurred and the consequences of present policies on the stream of future deficits (a forward-looking debt).
  - Pension and other long-term fiscal reforms are highly necessary to dampen aging costs and secure confidence in sustainability.

### Staff appraisal: synthesis and urgency
- After 15 years of growth led by a housing boom, a sharp correction of accumulated imbalances is underway; with construction collapsing, banks under pressure, foreign demand faltering, and weak competitiveness, Spain needs both cyclical support and substantial reforms.
- Key messages:
  - Reforms that cut costs and improve productivity are essential because Spain cannot devalue its currency.
  - Simultaneous product and labor market reforms require strong and full implementation to deflate margins and lower costs.
  - Persistent inflation differential with euro partners reflecting high margins and high unit labor costs has resulted in a competitiveness gap.
  - Labor market reform plans are deemed disappointing given the competitiveness and unemployment challenge; Spain needs extended strong wage moderation and structural macroeconomic labor reforms, including:
    - Elimination of wage indexation.
    - Earlier adoption of opt-out clauses from bargaining contracts to preserve employment.
    - Reduction in segmentation between fixed-time and full-time contracts.
    - Equalization of dismissal costs in these job market segments at a low level to boost hiring and mobility.

*Source: Excerpt from IMF staff report (content unit: _cr09128 - 40).*

### 54.      It is recommended that Spain remain on the 12-month Consultation cycle.

### _cr09128 - 54.      It is recommended that Spain remain on the 12-month Consultation cycle.

### Recommendation
- It is recommended that Spain remain on the 12-month Consultation cycle.

### Macroeconomic projections (demand and supply in constant prices)
- Gross domestic product: 2.7, 3.1, 3.3, 3.6, 3.9, 3.7, 1.2, -1.7
- Private consumption: 2.8, 2.9, 4.2, 4.2, 3.9, 3.5, 0.5, -2.0
- Public consumption: 4.5, 4.8, 6.3, 5.5, 4.6, 4.9, 5.0, 3.4
- Gross fixed investment: 3.4, 5.9, 5.1, 7.0, 7.1, 5.3, -2.1, -15.7
- Construction investment: 6.3, 6.2, 5.4, 6.1, 5.9, 3.8, -4.7, -15.2
- Other: -0.2, 5.2, 4.6, 8.4, 9.1, 7.9, 1.2, -16.5
- Stockbuilding (contribution to growth): 0.0, -0.1, 0.0, -0.1, 0.2, -0.1, 0.0, -0.1
- Total domestic demand: 3.2, 3.8, 4.8, 5.1, 5.1, 4.2, 0.5, -5.0
- Net exports (contribution to growth): -0.6, -0.8, -1.7, -1.7, -1.5, -0.8, 0.7, 3.6
- Exports of goods and services: 2.0, 3.7, 4.2, 2.5, 6.7, 4.9, 2.6, -0.4
- Imports of goods and services: 3.7, 6.2, 9.6, 7.7, 10.3, 6.2, -0.1, -11.0
- Potential output growth (long run HP-filter): 3.3, 3.1, 2.9, 2.7, 2.4, 2.1, 1.8, 1.6
- Output gap (percent of potential): 0.2, 0.1, 0.5, 1.4, 2.9, 4.5, 3.9, 0.4
- Non-financial private sector borrowing 1/: 14.1, 15.8, 16.3, 21.2, 24.2, 15.4, 8.0, ...
- Household savings (percent of disposable income): 11.4, 12.0, 11.3, 11.3, 11.2, 10.2, ......

### Prices
- GDP deflator: 4.3, 4.1, 4.0, 4.3, 4.0, 3.2, 3.1, 1.3
- HICP (average): 3.6, 3.1, 3.1, 3.4, 3.6, 2.8, 4.1, 0.8
- HICP (end of period): 4.0, 2.7, 3.3, 3.7, 2.7, 4.3, 1.5, 1.5
- Differential with euro area average: 1.3, 1.0, 0.9, 1.2, 1.4, 0.7, ......

### Employment and wages
- Unemployment rate (in percent): 11.5, 11.5, 11.0, 9.2, 8.5, 8.3, 11.0, 15.6
- Unit labor cost in manufacturing: 2.7, 2.7, 1.6, 2.5, 2.7, 1.1, 6.3, 1.0
- Labor cost in manufacturing: 5.0, 4.9, 4.0, 3.5, 4.2, 3.4, 5.1, 2.3
- Employment growth: 2.4, 3.1, 3.5, 4.1, 3.9, 3.0, -0.4, -3.9
- Labor participation rate (in percent) 2/: 70.3, 71.2, 72.0, 72.1, 73.2, 73.9, ......

### Balance of payments (percent of GDP)
- Trade balance (goods): -5.0, -5.1, -6.4, -7.5, -8.5, -8.5, -8.2, -4.4
- Current account balance: -3.3, -3.5, -5.3, -7.4, -8.9, -10.1, -9.7, -5.5
- Official reserves excl. gold (US$ billions): 34.5, 19.8, 12.4, 9.7, 10.8, 11.5, ......
- Nominal effective rate (2000=100): 102.9, 106.7, 107.8, 105.9, 107.4, 109.8, ......
- Real effective rate (2000=100, CPI-based): 106.5, 111.2, 113.4, 113.3, 115.8, 119.7, ......

### Public finance (percent of GDP)
- General government balance: -0.5, -0.2, -0.3, 1.0, 2.0, 2.2, -3.1, -6.1
- Primary balance: 2.2, 2.1, 1.7, 2.8, 3.7, 3.8, -1.5, -4.4
- Structural balance: -1.1, -1.0, -1.0, -1.6, -1.2, -1.1, -4.2, -5.2
- General government debt: 52.5, 48.7, 46.2, 43.0, 39.6, 36.2, 38.6, 48.6

### Selected Financial Soundness Indicators (highlights)
- Own funds to risk-weighted assets 1/: 12.7, 12.3, 12.0, 11.9, 11.4, 12.2  (2/ As of end-June)
- Tier 1 capital to risk-weighted assets 1/: 8.6, 8.1, 8.2, 7.6, 7.9, 8.1  (2/ As of end-June)
- Own funds to total assets 1/: 7.3, 6.7, 6.7, 7.2, 6.7, 5.5  (2/ As of end-June)
- Returns on average assets 1/: 0.8, 0.8, 0.9, 1.0, 1.1, 1.0  (2/ As of end-June)
- Returns on average equity 1/: 15.3, 14.8, 17.6, 20.7, 21.0, 17.7  (2/ As of end-June)
- Net interest income to gross income 1/: 62.6, 61.7, 59.2, 57.0, 58.1, 59.8  (2/ As of end-June)
- Operating expenses to gross income 1/: 56.4, 57.0, 53.6, 48.4, 45.5, 44.1  (2/ As of end-June)
- Non performing loans (EUR bn): 7.7, 7.5, 9.6, 10.9, 16.3, 46.1  (3/ As of end-August)
- Non-performing to total loans: 1.0, 0.8, 0.8, 0.7, 0.9, 2.5  (3/ As of end-August)
- Provisions to non-performing loans: 263.8, 322.1, 255.5, 272.2, 214.6, 87.1  (3/ As of end-August)
- Exposure to construction sector (EUR bn): 65.8, 78.4, 100.8, 134.3, 153.5, 155.6  (2/ As of end-June)
- Liquid to total assets 4/: 17.1, 15.8, 15.9, 11.1, 11.4, 12.2  (3/ As of end-August)
- Use of ECB refinancing (EUR bn) 5/: 25.6, 24.5, 30.3, 21.3, 52.3, 49.4  (3/ As of end-August)
- Loan-to-deposit ratio: 145.5, 150.3, 161.0, 165.0, 168.2, 160.0  (3/ As of end-August)
- Macroeconomic indicators: Real GDP (percent growth): 3.1, 3.3, 3.6, 3.9, 3.7, 1.2; HICP (average; percent growth): 3.1, 3.1, 3.4, 3.6, 2.8, 4.1; Unemployment rate: 11.5, 11.0, 9.2, 8.5, 8.3, 11.2; Current account (in percent of GDP): -3.5, -5.3, -7.4, -8.8, -10.1, -10.1; Credit to the private sector (percent growth): 14.3, 17.9, 27.2, 25.4, 16.7, 9.3  (3/ As of end-August)

### Financial Soundness of Non-banking Sectors (highlights)
- Insurance sector solvency ratio 2/: 2.8, 2.7, 2.6
- Insurance sector profitability (return on average equity): 9.3, 6.1, 15.2, 21.8, 21.7, 22.1, 26.4...
- Corporate total debt as a percentage of GDP: 69.3, 74.2, 78.8, 89.2, 105.8, 117.1, 118.0
- Corporate profitability (Return on equity) series: 11.0, 11.0, 11.9, 12.8, 13.2, 12.5...
- Household total debt as a percentage of disposable income: 79.3, 88.3, 98.4, 110.4, 123.1, 131.1, 131.3
- Household debt service burden to total disposable income: 12.4, 12.5, 13.3, 14.2, 15.6, 17.5, 17.9
- House price inflation 4/: 15.7, 17.6, 17.5, 13.9, 10.4, 5.8, 0.7
- Mortgage loans as percent of total credit to the resident non-monetary private sector: 50.5, 53.7, 56.2, 59.0, 58.6, 57.9, 57.4

### Status of Implementation of Main FSAP Recommendations (selected)
- Tighten provisioning or capital requirements for nontraditional housing and construction loans: Short term — Circulars 4/2004 and 3/2008 provide a prudent framework.
- Adopt most conservative approach under Basel II for industrial participations: Short term — Circular 3/2008 gives preference to VaR approach.
- Ongoing reforms of the Statutes of the Autonomous Communities should clearly maintain prudential and supervisory responsibilities at the State level: Short term — revisions basically maintain status quo with Bank of Spain retaining responsibility.
- Separate insurance supervision from the Ministry of Economy: Medium term — proposal to transfer solvency regulation to Bank of Spain and consumer protection issues to CNMV is currently stalled.
- Delegate authority to issue norms and sanction violations from the Ministry of Economy and Council of Ministers to regulatory agencies: Short term or within 12 months — Pending.
- Create institutional mechanism for permanent coordination among main regulators: Short term — Establishment of the Financial Stability Committee.
- Appoint members of the CNMV's board to longer non-renewable terms: Medium term — Pending.
- Monitor results of 2002–03 governance regulations on savings banks: Medium term or 1 to 3 years — Ongoing public debate.
- Allow savings banks to merge freely within and across Autonomous Communities if Bank of Spain approves: Medium term — Legal framework unchanged but some potential mergers underway.
- Promote use of cuotas participativas to raise high-quality capital: Medium term — One savings bank has issued cuotas participativas.
- Reduce over time public sector representation ceiling on savings bank boards: Medium term — Ongoing public debate.

### General Government Operations — Baseline scenario (Billions of euros / Percent of GDP)
- Revenue (billions of euros): 431.1 (2007), 405.7 (2008), 397.4 (2009), 402.8 (2010), 417.0 (2011), 434.1 (2012), 455.1 (2013), 480.8 (2014)
  - Indirect taxes: 122.8, 110.2, 109.0, 110.8, 113.9, 117.5, 123.0, 130.2
  - Personal (PIT): 81.3, 76.6, 76.6, 78.2, 80.7, 83.8, 87.5, 91.7
  - Corporate (CIT): 54.5, 37.1, 37.5, 38.2, 39.7, 41.7, 44.4, 47.3
  - Social security contributions: 136.6, 144.0, 136.6, 137.6, 141.9, 148.1, 155.6, 164.8
  - Other: 31.3, 32.7, 32.5, 32.9, 34.4, 35.5, 36.9, 38.6
  - Capital: 4.6, 5.0, 5.0, 5.1, 6.3, 7.5, 7.8, 8.1
- Primary expenditure (billions of euros): 391.0, 422.3, 445.4, 447.1, 449.5, 454.6, 463.7, 478.2
  - Wages and salaries: 107.1, 116.7, 120.2, 122.9, 125.5, 128.1, 130.8, 134.7
  - Goods and services: 54.0, 56.3, 58.6, 59.9, 61.1, 62.3, 63.5, 65.4
  - Social transfers: 148.3, 160.9, 170.0, 173.8, 177.2, 178.8, 182.5, 187.1
  - Capital (in primary expenditure): 54.9, 58.4, 64.4, 59.0, 56.9, 56.7, 58.3, 61.2
- Primary balance (billions of euros): 40.1, -16.6, -48.0, -44.3, -32.5, -20.5, -8.6, 2.6
- Interest (billions of euros): 16.9, 17.2, 18.6, 21.6, 24.0, 26.3, 28.2, 29.7
- Overall balance (billions of euros): 23.3, -33.8, -66.6, -65.8, -56.5, -46.8, -36.8, -27.1
- Revenue (percent of GDP): 41.0, 37.0, 36.4, 36.5, 36.8, 37.2, 37.5, 37.9
- Primary balance (percent of GDP): 3.8, -1.5, -4.4, -4.0, -2.9, -1.8, -0.7, 0.2
- Interest (percent of GDP): 1.6, 1.6, 1.7, 2.0, 2.1, 2.3, 2.3, 2.3
- Overall balance (percent of GDP): 2.2, -3.1, -6.1, -6.0, -5.0, -4.0, -3.0, -2.1
- Government debt 1/: 36.2, 38.6, 48.6, 53.8, 56.8, 55.6, 56.6, 56.3
- Government debt and guaranteed debt 2/: 38.9, 52.0, 74.5, 80.4, 74.0, 63.7, 64.4, 63.7
- Memorandum item structural balance: -1.1, -4.2, -5.2, -4.3, -3.3, -2.5, -1.8, -1.3

### Public Sector Balance Sheet (Billions of euros; selected items)
- Financial assets (billions of euros): 169, 241, 274, 302, 325, 364
  - Currency and deposits: 5, 7, 6, 8, 9, 10, 11, 5
  - Securities other than shares: 2, 3, 1, 4, 0, 5, 2, 5
  - Loans: 26, 35, 37, 41, 43, 43, 43, 3
  - Shares and other equity: 59, 71, 77, 82, 85, 82, 85, 5
  - Other accounts receivable: 26, 29, 30, 29, 30, 30
  - Assets of FAAF: 0,0,0,0,1,0
- Financial liabilities (billions of euros): 448, 517, 514, 505, 557, 663
  - Securities other than shares: 33, 53, 82, 36, 43, 64, 35, 0
  - Loans: 73, 82, 82, 81, 84, 84, 84, 8
- Financial Net worth (billions of euros): -279, -276, -240, -203, -233, -299
- Nonfinancial fixed assets (net): 303, 436, 472, 504, 526, 524
- Current net worth: 241, 612, 323, 0, 129, 322, 4
- NPV of future primary balances 1/: -73, -392, -478, -717, -1,736, -1,826
- Intertemporal net worth: -49, -231, -246, -416, -1,443, -1,602
- Memorandum items government debt 3/: 59, 43, 40, 36, 39, 49
- GDP (billions of euros): 630, 909, 982, 1,051, 1,096, 1,091

### Balance of Payments — Projections (Billions of euros and percent of GDP)
- Current Account (billions of euros): -105.9 (2007), -106.2 (2008), -60.3 (2009), -46.8 (2010), -43.1 (2011), -40.4 (2012), -39.7 (2013), -38.6 (2014)
  - Trade Balance of goods and services (billions of euros): -67.7, -64.6, -17.7, -6.6, -1.8, 2.3, 4.7, 7.9
  - Exports of goods and services (billions of euros): 281.3, 297.4, 295.9, 303.5, 313.4, 325.7, 340.0, 357.4
    - Exports of goods: 187.2, 198.8, 196.5, 201.9, 208.6, 217.0, 226.4, 237.9
    - Exports of services: 94.2, 98.5, 99.4, 101.6, 104.8, 108.8, 113.6, 119.5
  - Imports of goods and services (billions of euros): -349.0, -362.0, -313.6, -310.1, -315.2, -323.4, -335.3, -349.5
    - Imports of goods: -277.0, -288.8, -244.7, -243.0, -247.4, -254.0, -263.3, -274.5
    - Imports of services: -72.0, -73.1, -68.9, -67.1, -67.8, -69.5, -71.9, -75.0
  - Balance of factor income (billions of euros): -31.5, -35.2, -37.0, -34.5, -35.5, -36.7, -38.2, -40.0
  - Balance of current transfers (billions of euros): -6.7, -6.4, -5.6, -5.7, -5.8, -6.0, -6.2, -6.5
- Capital Account (billions of euros): 4.5, 5.5, 5.5, 4.4, 4.5, 4.7, 3.6, 3.8
- Financial Account (billions of euros): 97.6, 96.9, 54.9, 42.4, 38.6, 35.7, 36.0, 34.8
  - Foreign Direct Investment: -49.5, 9.9, 12.0, 15.5, 9.1, 8.2, 6.1, 6.3
  - Portfolio Investment: 89.5, 43.8, 41.4, 23.6, 17.2, 5.2, -1.0, -2.3
  - Other Investment: 57.9, 43.3, 1.5, 3.4, 12.3, 22.4, 31.0, 30.8
- Current Account (percent of GDP): -10.1, -9.7, -5.5, -4.2, -3.8, -3.5, -3.3, -3.0
  - Trade Balance of goods and services (percent of GDP): -6.4, -5.9, -1.6, -0.6, -0.2, 0.2, 0.4, 0.6
  - Exports of goods and services (percent of GDP): 26.8, 27.1, 27.1, 27.5, 27.7, 27.9, 28.0, 28.2
  - Imports of goods and services (percent of GDP): -33.2, -33.0, -28.7, -28.1, -27.8, -27.7, -27.7, -27.6
- Financial Account (percent of GDP): 9.3, 8.8, 5.0, 3.8, 3.4, 3.1, 3.0, 2.7
  - Foreign Direct Investment (percent of GDP): -4.7, 0.9, 1.1, 1.4, 0.8, 0.7, 0.5, 0.5
  - Portfolio Investment (percent of GDP): 8.5, 4.0, 3.8, 2.1, 1.5, 0.4, -0.1, -0.2
  - Other Investment (percent of GDP): 5.5, 3.9, 0.1, 0.3, 1.1, 1.9, 2.6, 2.4

### International Investment Position (selected)
- International Investment Position (EUR bn): -298 (2003), -436 (2004), -505 (2005), -668 (2006), -826 (2007), -867 (2008)
- Direct Investment (EUR bn): -37, -92, -67, -41, -12, -17
- Assets (EUR bn) total: 232, 207, 259, 310, 395, 429
- Liabilities (EUR bn) total: 269, 299, 326, 351, 407, 445
- Bank of Spain (EUR bn): 56, 68, 72, 96, 79, 95
  - o/w Reserve Assets: 21, 15, 15, 15, 13, 14
- International Investment Position (percent of GDP): -38.0, -51.9, -55.6, -68.0, -78.6, -79.5
- Direct Investment (percent of GDP): -4.8, -10.9, -7.4, -4.2, -1.2, -1.5
- Portfolio Investment (percent of GDP): -13.1, -24.2, -30.1, -51.8, -61.6, -57.8

### External Debt Sustainability Framework (selected)
- Baseline: External debt (percent of GDP): 88.4 (2003), 96.4 (2004), 114.0 (2005), 127.2 (2006), 134.5 (2007), 138.6 (2008), 144.6 (2009), 149.0 (2010), 153.3 (2011), 156.6 (2012), 159.4 (2013)
- Change in external debt (percent of GDP): 4.5, 8.0, 17.6, 13.2, 7.3, 4.1, 6.0, 4.4, 4.3, 3.3, 2.8
- Identified external debt-creating flows (4+8+9): -0.7, 2.1, 2.5, 8.3, 6.1, 7.2, 6.5, 2.4, 0.9, -0.2, -0.7
- Current account deficit, excluding interest payments: -0.8, 0.7, 2.1, 2.5, 2.2, 1.3, -2.9, -4.0, -4.4, -4.7, -4.9
- Deficit in balance of goods and services: 2.1, 3.8, 5.1, 6.2, 6.4, 5.9, 1.6, 0.6, 0.2, -0.2, -0.4
- Net non-debt creating capital inflows (negative): 0.7, 2.5, 2.4, 7.8, 3.6, -1.1, -1.5, -2.0, -1.6, -1.6, -1.5
- Automatic debt dynamics 1/: -0.6, -1.1, -1.9, -2.0, 0.3, 7.0, 10.9, 8.3, 6.8, 6.1, 5.7
  - Contribution from nominal interest rate: 4.3, 4.6, 5.3, 6.5, 7.9, 8.4, 8.4, 8.2, 8.2, 8.2, 8.2
  - Contribution from real GDP growth: -2.0, -2.4, -3.2, -4.1, -4.0, -1.4, 2.4, 0.1, -1.3, -2.0, -2.5
  - Contribution from price and exchange rate changes 2/: -2.9, -3.2, -4.0, -4.4, -3.6, ...
- Residual, incl. change in gross foreign assets (2-3) 3/: 5.2, 5.9, 15.0, 5.0, 1.2, -3.1, -0.5, 2.0, 3.5, 3.5, 3.5
- External debt-to-exports ratio (in percent): 337.0, 371.4, 442.2, 479.5, 502.3, 511.0, 533.4, 542.3, 553.8, 561.3, 568.3
- Gross external financing need (in billions of US dollars) 4/: 317.7, 453.8, 561.3, 744.9, 857.8, 1061.7, 1285.3, 1294.0, 1347.0, 1418.3, 1496.0
- Gross external financing need (percent of GDP): 35.9, 43.4, 49.6, 60.4, 59.6, 63.6, 78.4, 77.6, 78.5, 79.8, 80.8

### External Debt Sensitivity and Stress Tests (selected)
- Interest rate shock (permanent two standard deviation): Baseline 159; i-rate shock 173; scenario boxes show averages and historical comparators.
- Non-interest current account shock, growth shock, real depreciation shock (30 percent one-time in 2009), combined shock and gross financing need under baseline and scenarios are presented in bounded tests (figures and box averages included).

*Source: Staff Report for the 2008 Article IV Consultation — Informational Annex, European Department, February 3, 2009.*

### Appendix I. Spain: FUND RELATIONS

### Appendix I. Spain: FUND RELATIONS

### I. Membership Status
- Joined September 15, 1958.

### II. General Resources Account
- Quota: 3,048.90 SDR Million (100.00 percent of Quota)
- Fund holdings of currency: 2,626.61 SDR Million (86.15 percent of Quota)
- Reserve position in Fund: 422.32 SDR Million (13.85 percent of Quota)

### III. SDR Department
- Net cumulative allocation: 298.81 SDR Million (100.00 percent of Allocation)
- Holdings: 144.92 SDR Million (48.50 percent of Allocation)

### IV. Projected Payments to Fund (SDR Million)
- Charges/Interest forthcoming:
  - 2009: 1.37
  - 2010: 1.28
  - 2011: 1.28
  - 2012: 1.28
  - 2013: 1.28
- Total forthcoming:
  - 2009: 1.37
  - 2010: 1.28
  - 2011: 1.28
  - 2012: 1.28
  - 2013: 1.28

### V. 2008 Article IV Consultation — Mission and Coverage
- Staff team visited Madrid on November 28–December 9, 2008.
- Team composition: B. Traa (Head), K. Honjo, M. Moreno-Badia, C. Henn (all EUR), and A. Giustiniani (MCM).
- Spanish Executive Director’s office participants: Mr. Guzman and Ms. Valle.
- Outreach included meetings with parliamentarians, trade unions, employers’ organizations, bankers, and independent analysts.
- Concluding statement published; staff report expected to be published.
- Background papers included:
  1. Developments in the Spanish Housing Sector
  2. The Spanish Banking System
  3. Long-Run Fiscal Outlook and the Public Sector Balance Sheet
  4. Productivity Growth and Structural Reforms
- Consultation informed by country report No. 08/145: France, Greece, Italy, Portugal, and Spain, Competitiveness in the Southern Euro Area.
- Spain is on a standard 12-month cycle.
- Last Article IV consultation discussions concluded on May 16, 2007 (EBM/07/42–1).

### VI. Exchange Rate Arrangements and Restrictions
- Currency: euro, which floats freely and independently against other currencies.
- Spain has accepted the obligations of Article VIII, Sections 2, 3, and 4.
- Maintains an exchange rate system free of restrictions on payments and transfers for current international transactions, other than restrictions notified to the Fund under Decision No. 144 (52/51).

### Supplementary Information — Key Updates since Staff Report (Prepared by European Department; Approved March 6, 2009)
- Real GDP growth revisions:
  - Q4 2008 growth: -1.0 percent (Q/Q) compared with -0.7 percent projected in the staff report.
  - Staff projects 2009 growth could be as low as -3.0 percent, compared with -1.7 percent in the staff report.
  - Moderate quarterly growth expected to resume in the first half of 2010.
- CPI inflation:
  - February inflation: 0.7 percent (Y/Y).
  - Inflation is now slightly below euro-partner countries and expected to remain very low in 2009 on average.
- Unemployment:
  - Last quarter of 2008 unemployment rate: 13.9 percent.
  - Staff projection: unemployment could peak at over 19 percent of the workforce in 2010.
- External and domestic imbalances:
  - Private sector strongly cutting debt; stock of mortgage credit declining in nominal terms.
  - Imports started falling at a double digit rate toward end-2008.
  - Exports falling slightly less; external current account deficit shrinking substantially.
- Fiscal results:
  - Authorities increased their estimate for the 2008 general government deficit to 3.8 percent of GDP.
  - Staff projects a 2009 fiscal deficit of 7½ percent of GDP.
  - Spain lost its AAA credit rating; sovereign spread over 10-year German bonds risen from 80 to around 115 bp.
- Banking system developments:
  - Banking system impaired loans risen to 3½ percent.
  - Loan-loss-provision coverage declined to 70 percent (from above 200 percent as of end-2007).
  - Banks placed some 20 billion euros in high-grade securities with the government’s liquidity assistance fund (FAAF).
  - Some banks used government guarantees to place debt.
- Bank consolidation and policy stance:
  - Increased pressure on the banking system; savings banks (cajas) contemplating mergers, including interregional mergers.
  - Authorities prefer market-based solutions for weaker institutions but ready to assist with capital injections if necessary.
- Structural reforms:
  - OECD indicators show Spain has made good progress in product and service market reforms.
  - Labor market reforms are stalled; limited progress in the “Social Dialogue.”
  - Staff views rigid labor structures as a contributor to competitiveness difficulties and high unemployment.

### Spain: Key Economic Indicators — Update from the Staff Report (Percent change otherwise indicated)
- Real GDP growth:
  - 2008 (Staff Report): 1.2
  - 2009 (Staff Report): -1.7
  - 2010 (Staff Report): -0.1
  - 2008 (Update): 1.2
  - 2009 (Update): -3.0
  - 2010 (Update): -0.7
- Total domestic demand:
  - 2008 (Staff Report): 0.5
  - 2009 (Staff Report): -5.0
  - 2010 (Staff Report): -1.4
  - 2008 (Update): 0.2
  - 2009 (Update): -6.3
  - 2010 (Update): -1.7
- Consumption:
  - 2008 (Staff Report): 1.6
  - 2009 (Staff Report): -0.7
  - 2010 (Staff Report): 0.0
  - 2008 (Update): 1.4
  - 2009 (Update): -1.2
  - 2010 (Update): 0.1
- Fixed investment:
  - 2008 (Staff Report): -2.1
  - 2009 (Staff Report): -15.7
  - 2010 (Staff Report): -6.1
  - 2008 (Update): -3.0
  - 2009 (Update): -19.1
  - 2010 (Update): -7.3
- Net exports (contribution to growth):
  - 2008 (Staff Report): 0.7
  - 2009 (Staff Report): 3.6
  - 2010 (Staff Report): 1.4
  - 2008 (Update): 1.0
  - 2009 (Update): 3.7
  - 2010 (Update): 1.0
- CPI inflation, pa:
  - 2008 (Staff Report): 4.1
  - 2009 (Staff Report): 0.8
  - 2010 (Staff Report): 1.6
  - 2008 (Update): 4.1
  - 2009 (Update): 0.5
  - 2010 (Update): 1.5
- Unemployment rate (percent):
  - 2008 (Staff Report): 11.0
  - 2009 (Staff Report): 15.6
  - 2010 (Staff Report): 17.0
  - 2008 (Update): 11.3
  - 2009 (Update): 17.7
  - 2010 (Update): 19.3
- Current account balance (percent of GDP):
  - 2008 (Staff Report): -9.7
  - 2009 (Staff Report): -5.5
  - 2010 (Staff Report): -4.2
  - 2008 (Update): -9.6
  - 2009 (Update): -5.4
  - 2010 (Update): -4.4
- General government balance (percent of GDP):
  - 2008 (Staff Report): -3.1
  - 2009 (Staff Report): -6.1
  - 2010 (Staff Report): -6.0
  - 2008 (Update): -3.8
  - 2009 (Update): -7.5
  - 2010 (Update): -7.5
- Structural balance (percent of GDP):
  - 2008 (Staff Report): -4.2
  - 2009 (Staff Report): -5.2
  - 2010 (Staff Report): -4.3
  - 2008 (Update): -4.2
  - 2009 (Update): -5.2
  - 2010 (Update): -4.3
- General government debt (percent of GDP):
  - 2008 (Staff Report): 38.6
  - 2009 (Staff Report): 48.6
  - 2010 (Staff Report): 53.8
  - 2008 (Update): 39.4
  - 2009 (Update): 51.5
  - 2010 (Update): 58.5

### Public Information Notice (PIN) No. 09/50 — Executive Board Concludes 2008 Article IV Consultation with Spain (April 22, 2009)
- Executive Board concluded the Article IV consultation on March 11, 2009.
- Background summary:
  - After 15 years of growth led by a housing boom, Spain entered a sharp downturn following the global liquidity squeeze since mid-2007.
  - Private consumption slowed due to weakening disposable incomes, rising unemployment, and deleveraging.
  - Housing investment and machinery and equipment outlays slumped.
  - External current account deficit started to narrow from 10 percent of GDP in 2007.
  - General government balance switched from moderate surpluses in 2005–07 to sizeable deficits due to discretionary measures and falling tax bases, including housing.
  - Debt ratio increasing quickly from recent low of 36.2 percent of GDP.
- Banking sector:
  - Banks under strain; impaired loans increasing from housing downturn and unemployment.
  - Wholesale funding tight; competition for deposits intense.
  - Authorities implemented deposit insurance extension, direct funding (Fondo para la Adquisición de Activos Financieros), and funding guarantees.
- Competitiveness and inflation:
  - Wage and unit-labor costs outpacing euro-partner countries; inflation structurally above euro average.
  - Factors: insufficiently contested domestic output markets, segmented labor markets, relatively low productivity and competitiveness.

### Executive Board Assessment — Main Points and Policy Recommendations
- Directors noted the severe downturn and abrupt unwinding of imbalances due to the global financial crisis.
- Fiscal and financial sector responses were commended as timely and substantial.
- Directors emphasized complementing these efforts with reforms to bolster competitiveness to avoid prolonged slow growth and high unemployment.
- Specific recommendations and observations:
  - Sustained efforts to reduce domestic costs and increase flexibility and productivity to slow unit labor cost growth.
  - Housing sector adjustment likely to take time; welcomed activation of the rental market and mortgage assistance to newly unemployed; questioned building more subsidized homes at this time.
  - Fiscal policy:
    - Commended early bold countercyclical fiscal policies.
    - Automatic stabilizers should function freely.
    - Further fiscal stimulus should be considered only if downturn worsens, should be well-targeted and aim at facilitating structural reforms.
    - Fiscal policies should be anchored in a prudent, long-term sustainability framework.
    - Encouraged publication of inter-temporal public sector balance sheet as part of annual budget documents.
    - Stressed need for pension and other long-term reforms due to high costs associated with an aging population.
  - Structural reforms:
    - Urged vigorous implementation of product and labor market reforms to improve competitiveness, reduce inflation differential with euro area, and increase productivity.
    - Welcomed plans for product and service market reforms aligned with a unified EU market; urged timely implementation of relevant Directives.
    - Called for comprehensive labor market reforms, wage moderation and differentiation by reducing wage indexation, and reforms to bolster labor flexibility and employment.
  - Banking sector:
    - Praised timely banking assistance and strong supervisory/regulatory policies, including dynamic loan-loss provisions.
    - Noted challenge of assisting banks through the difficult operating environment and reducing excessive reliance on wholesale funding.
    - Welcomed design of liquidity and funding assistance with sunset clauses and pricing, and enhanced deposit insurance as agreed with EU partners.
    - Expected deteriorating asset quality and higher capitalization demands to increase likelihood of consolidation in the banking system.
    - Welcomed authorities’ readiness to act, focusing on market-based solutions complemented by capital provision if needed.
    - Highlighted vulnerability of savings banks due to dependence on local real estate; supported close monitoring, interregional mergers, and greater use of participating capital shares as conditions permit.
    - Emphasized importance of tight cross-border cooperation with EU, U.S., and Latin American supervisors.

### Spain: Selected Economic Indicators, 2004–08 (Selected entries)
- Real GDP (change in percent):
  - 2004: 3.3
  - 2005: 3.6
  - 2006: 3.9
  - 2007: 3.7
  - 2008: 1.2
- Domestic demand:
  - 2004: 4.8
  - 2005: 5.1
  - 2006: 5.1
  - 2007: 4.2
  - 2008: 0.2
- HICP (average):
  - 2004: 3.1
  - 2005: 3.4
  - 2006: 3.6
  - 2007: 2.8
  - 2008: 4.1
- Unemployment rate (in percent):
  - 2004: 11.0
  - 2005: 9.2
  - 2006: 8.5
  - 2007: 8.3
  - 2008: 11.3
- Public finance (general government; percent of GDP):
  - Overall balance:
    - 2004: -0.3
    - 2005: 1.0
    - 2006: 2.0
    - 2007: 2.2
    - 2008: -3.8
  - Primary balance:
    - 2004: 1.7
    - 2005: 2.8
    - 2006: 3.7
    - 2007: 3.8
    - 2008: -2.3
- Interest rates:
  - Money market rate:
    - 2004: 2.1
    - 2005: 2.2
    - 2006: 3.1
    - 2007: 3.8
    - 2008: 4.6
  - Government bond yield:
    - 2004: 4.1
    - 2005: 3.4
    - 2006: 3.8
    - 2007: 4.4
    - 2008: 5.3
- Balance of payments (percent of GDP):
  - Trade balance:
    - 2004: -3.8
    - 2005: -5.1
    - 2006: -6.2
    - 2007: -6.4
    - 2008: -5.6
  - Current account:
    - 2004: -5.3
    - 2005: -7.4
    - 2006: -8.9
    - 2007: -10.1
    - 2008: -9.6
- Fund position (as of January 31, 2009):
  - Holdings of currency (in percent of quota): 86.2
  - Holdings of SDRs (in percent of allocation): 49.7
  - Quota (in millions of SDR): 3,048.9
- Exchange rate:
  - Exchange rate regime: Euro Area Member
  - Present rate (February 11, 2009): US$ 1.2938 per euro
  - Nominal effective rate (2000 = 100):
    - 2004: 106.5
    - 2005: 106.3
    - 2006: 106.5
    - 2007: 108.1
    - 2008: 110.5
  - Real effective rate (2000 = 100):
    - 2004: 115.5
    - 2005: 119.0
    - 2006: 120.5
    - 2007: 124.0
    - 2008: 129.8

*Prepared by the European Department; supplementary information approved March 6, 2009; Public Information Notice No. 09/50, April 22, 2009.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09128.pdf_