## _cr12202 ## Source details **Canonical URL:** [_cr12202](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12202.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12202.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12202.pdf.json) --- ### Financial-sector policies, assistance terms, and implementation - Key MoU policies accompanying EFSF financial support: - Identifying individual bank capital needs based on a comprehensive asset quality review and an independent bank-by-bank stress test. - Recapitalizing, restructuring and/or resolving weak banks. - Segregating legacy assets of weak banks into an asset management company. - Burden sharing from hybrid/subordinated-debt holders in banks receiving public capital. - Strengthening supervision and regulation. - Financial assistance terms: - Estimated capital requirements with an additional safety margin summing up to €100 billion in total. - Disbursed in several tranches over the 18-month duration of the program. - Average maturity of 12½ years. - First tranche of €30 billion expected to be pre-funded and kept by EFSF as a contingency. - Verification and monitoring: - European Commission, in liaison with the ECB and EBA, to verify at regular intervals that policy conditions are fulfilled. - Spanish authorities requested technical assistance from the Fund to support monitoring with regular reporting. - Operational/timing details reported by authorities: - Evaluation of individual capital needs to be finalized in September. - Banks not needing public support have until June 30, 2013 to raise necessary capital from private sources. - Minimum Common Equity Tier 1 ratio of 9 percent for all credit institutions requested from December 31, 2012 onwards. - Transfer of impaired assets to an external Asset Management Company operational by November. ### Banking sector vulnerabilities, metrics, and stress-test findings - Funding and liquidity: - Spanish banks face €158 billion (medium- and long-term) debt redemption in 2012–13. - System-level liquidity buffers appear sufficient but collateral posted at the ECB is vulnerable to ratings downgrades and margin calls. - Liquidity stress tests indicate liquidity risk can potentially become the biggest risk should ECB support not be renewed. - Asset quality and capital: - Nonperforming loans reached 8.7 percent of gross loans in April. - Including assets repossessed from developers and households, impaired loans amount to about 12 percent of gross loans. - Core capital ratio buttressed from less than 7 percent in mid-2008 to about 9 percent (including state support). - Provision and specific capital buffer requirements against real estate amounting to about 7 percent of GDP; this would bring coverage of the total problematic portfolio to about 70 percent. - Restructuring and consolidation: - By end-2012, ten institutions will have been resolved since 2008. - Number of former savings banks reduced to 8 (from 45 at the beginning of the crisis). - Bank employees reduced by 11 percent; branches reduced by 13 percent. - Authorities and the industry (via the Deposit Guarantee Fund) have outstanding funding and capital support amounting to about 9 percent of GDP. - In early May, FROB intervened the holding company of the fourth largest bank, taking a 46 percent ownership. - Stress tests and capital need estimates: - Under the adverse scenario, several banks would need to increase capital buffers by about 4 percent of GDP to comply with Basel III transition schedule (core tier 1 capital of 7 percent). - For a core tier 1 of 10 percent in the baseline scenario, recapitalization needs would be around 5 percent of GDP. - Independent consultants reported in June a potential capital need under an adverse scenario of around 5–6 percentage points of GDP. - Caveats: feedbacks between banking distress and economy not fully captured; capital needs larger when including restructuring costs and reclassification from independent valuations. ### Recommended final-phase banking reforms and supervisory upgrades - Independent valuation: - Assure quality and transparency; inclusion of staff of independent institutions to advise. - Triage and recapitalization: - Require banks quickly to meet additional provisioning and capital needs, drawing on the backstop as needed. - Triage banks into: (1) do not need support, (2) viable banks needing government support with tightly-monitored restructuring plans, (3) non-viable banks to be resolved. - Dealing with intervened banks: - New management of the fourth largest bank to present detailed restructuring strategy and timetable; announce strategy for other intervened banks including restructuring plans and estimated costs. - Consider strengthening the state’s ability to manage large stakes and enhance exit strategies. - Using the backstop and legacy assets: - Exact cost depends on valuations and restructuring costs; even if cost reached the full Eurogroup commitment of €100 billion, this would remain manageable from a debt sustainability perspective, provided envisaged fiscal adjustment is undertaken. - Announce goal of dealing comprehensively with legacy real estate assets; finalize options after independent valuations. - Liquidity facilitation: - Banks should take full advantage of widened collateral eligible for repo-operations. - BdE should streamline and expedite procedures to facilitate prepositioning of collateral by banks. - Supervisory and resolution framework upgrades: - Amend laws to allow overriding shareholders’ rights, partial transfer of assets and liabilities, allocation of losses to left-behind creditors, conversion of some bank debt into equities, and special administrative bank insolvency and liquidation procedures. - Allow FROB more rapid and flexible disposal mechanisms for intervened banks where systemic considerations arise. - FSAP main recommendations (selected): - Strengthen remedial actions and sanctioning powers; provide operational/regulatory independence to regulators; establish a risk-based regulatory framework for insurance; regular testing and contingency plans for market infrastructures; widen array of resolution tools; transform savings banks governance toward minority institutional investors. ### Fiscal sector: recent measures, projected paths, and staff assessments - Revised deficit path endorsed by the Council of the European Union (July 10): - 2012: 6.3 percent of GDP (previously 5.3) - 2013: 4.5 percent of GDP (previously 3.0) - 2014: 2.8 percent of GDP (previously 2.2) - Major fiscal measures announced (July 11): - VAT: standard rate raised from 18 to 21 percent; reduced rate from 8 to 10 percent; super-reduced rate unchanged at 4 percent. - Suspension of the extra payment in December to civil servants for 2012 — equivalent to nearly a monthly wage. - Removal of the mortgage income tax deduction. - Unemployment benefit reduced: replacement rate after six months falls from 60 to 50 percent. - Social security contributions reduced by one percentage point in 2013 and a further point in 2014. - Staff estimates and projections: - Staff’s preliminary estimate: cumulative size of the package between 2012–14, as currently planned, is about 2 percent of GDP. - Government debt projected to reach 97 percent of GDP in 2015, but declining slightly thereafter (staff includes full Eurogroup commitment of up to €100 billion (9.4 percent of GDP) in debt assessments for prudence). - Preliminary macro effects: level of output lowered by about 1 percent by 2014; unemployment would increase though mitigated by lower social security contributions and unemployment benefits and labor market reform; VAT increase combined with electricity price increases will temporarily raise inflation. - Staff view on 2011–12 slippage and recommended additional measures: - 2011 fiscal slippage: missed 6 percent of GDP target by almost 3 percent of GDP; adjustment in 2011 was only 0.4 percent of GDP. - Staff expects an overall deficit of around 7 percent of GDP for 2012, a deviation of around 1 ½ percent of GDP from target. - To avoid structural slippage, staff suggests immediately taking additional measures of at least 1 percent of GDP on a full year basis to reach a 2012 deficit of about 6 ¼ to 6 ½ percent of GDP. - Possible measures: eliminating some VAT exemptions, raising VAT rates (especially reduced rates), taxing the thirteenth salary, cutting fourth quarter capital expenditure. ### Medium-term fiscal path scenarios and quantitative excerpts (selected figures preserved exactly) - Overall balance (percent of GDP) - SGP: 2011 -8.9, 2012 -6.3, 2013 -3.0, 2014 -2.2, 2015 -1.1 - Current policies: 2011 -8.9, 2012 -7.0, 2013 -5.9, 2014 -5.3, 2015 -5.1, 2016 -4.5, 2017 -4.4 - Smooth(er): 2011 -8.9, 2012 -6.3, 2013 -4.5, 2014 -3.0, 2015 -2.0, 2016 -1.3, 2017 -0.5 - Primary balance - SGP: -6.4, -3.1, 0.7, 1.9, 3.4 - Current policies: -6.4, -3.7, -2.0, -1.0, -0.5, 0.5, 1.0 - Smooth(er): -6.4, -3.1, -0.8, 1.1, 2.4, 3.5, 4.7 - General government debt (percent of GDP) - SGP: 68.5, 89.8, 93.1, 94.1, 93.6 - Current policies: 68.5, 90.3, 96.5, 100.2, 102.7, 104.4, 105.9 - Smooth(er): 68.5, 89.8, 94.1, 95.8, 95.5, 94.7, 93.3 - GDP growth (index or percent as provided) - SGP: 0.7, -2.0, -1.3, -0.1, 0.0 - Current policies: 0.7, -1.5, -0.6, 1.1, 1.5, 1.6, 1.6 - Smooth(er): 0.7, -2.0, -0.8, 0.2, 0.5, 0.5, 0.4 ### Annex I – Debt dynamics, baseline projections, and alternative scenarios (selected figures) - Baseline public debt trajectory (percent of GDP, selected years): - 2011: 61.2 - 2012: 68.5 - 2013: 90.3 - 2014: 98.2 - 2015: 100.2 - 2016: 102.7 - 2017: 104.4 / 105.9 (table columns) - Gross general government debt financing needs would exceed 20 percent of GDP in 2012 and 2013. - Redemption of outstanding securities: 7.5 percent of GDP in the second half of 2012, and 11 percent in 2013. - Alternative debt scenarios (selected outcomes): - Interest rate shock (real rates reach 5.5 percent): debt would increase to 123 percent of GDP by 2017. - Growth shock (growth falls by a little over 1 percentage point): debt could reach 124 percent of GDP by 2017. - Euro depreciation and contingent liabilities (30 percent nominal depreciation + 10 percent of GDP contingent liability): raises debt-to-GDP trajectory to 117 percent. - Bound tests (percent of GDP, 2012–2017 example for No policy change): - 68.5, 90.3, 98.2, 104.7, 110.5, 116.6, 123.2. ### External financing and external sector assessment (Box 1, Annex V) - Past dynamics and recent shifts: - Over the past decade, Spain’s current account deficits had been financed by private capital inflows; this came to a sudden stop in 2011. - In the second half of 2011 and early 2012, net private capital outflows have been persistent. - Resulting financing needs covered in part by ECB SMP purchases and to a larger extent by a surge in bank refinancing with the Eurosystem. - Staff projections and central scenario: - Gradual decline in reliance on ECB financing; in central scenario ECB financing would not drop markedly before maturity of the 3 year LTROs and would still amount in 2015 to about half current levels. - Baseline gross external debt (percent of GDP, selected years): - 2011: 163.1 - 2012: 175.3 - 2013: 172.6 - 2014: 167.2 - 2015: 157.0 - 2016: 149.6 - 2017: 141.8 - Alternative external scenarios (impact on gross external debt by 2017): - Interest rate shock (~40 basis points): increase by more than 5 percentage points of GDP relative to baseline. - Growth shock: increase by close to 12 percentage points of GDP relative to baseline. - Current account shock: increase by close to 8 percentage points of GDP relative to baseline. - Standard combined shock: increase by about 11 percentage points of GDP relative to baseline. - Under all alternative scenarios gross external debt ratio would remain on a downward path at the projection horizon. ### Labor market reform, empirical findings, and policy priorities (Annexes II, Box 7) - Empirical diagnosis: - Spain exhibits wage inertia, high responsiveness of labor compensation to inflation, low sensitivity of wages to unemployment, and limited work-hours adjustment — contributing to high unemployment volatility. - Spain has the largest share of temporary workers in the OECD; temporary employment fell by 34 percent since end-2007 while open-ended contracts fell by 6 percent (example). - February 2012 labor market reform objectives: - Enhance market efficiency and reduce duality; foster firms’ internal flexibility; promote permanent employment and employment creation in small firms; make workers more employable and fungible. - Key measures (selected): - Reduce unfair dismissal compensation from 45 days/year up to 42 months to 33 days/year up to 24 months for new contracts. - Give priority to firm-level agreements over regional/industry agreements; ease opt-out clauses; limit ultra-activity to one year. - Temporary contract renewal limited to a maximum of two years starting in 2013; transition of termination cost to 9 days per year worked from January 2012 increasing to 12 days by January 2015. - New incentives for small firms, hiring bonuses, conversion bonuses, training rights (20 hours per year), and a new training contract for youth. - Implementation risks and enhancements: - Success hinges on implementation and judicial interpretation; possible strengthening options include reducing difference in protection between contract types, eliminating indexation and ultra-activity, better communication to firms, and contingency plans such as opt-in collective bargaining if firm-level flexibility does not materialize. - Staff and Directors’ recommendations: - Effective implementation of labor reform to bring down labor costs; complementary product and service market reforms; decisive measures to help small firms grow, deregulate fuel and postal sectors, liberalize retail hours and professional services, boost the rental market; and align wage moderation with hiring. ### Macro outlook, key projections, and risk matrix highlights (select figures preserved exactly) - Staff growth and labor market excerpts: - Gross domestic product (annual percent change): 3.6, 4.1, 3.5, 0.9, -3.7, -0.1, 0.7, -1.5, -0.6, 1.1, 1.5, 1.6, 1.6 - Unemployment rate (in percent): 9.2, 8.5, 8.3, 11.3, 18.0, 20.1, 21.6, 24.7, 24.4, 23.8, 22.9, 21.7, 20.3 - Current account balance (percent of GDP): -7.4, -9.0, -10.0, -9.6, -4.8, -4.5, -3.5, -2.0, -1.1, -0.6, 0.0, 0.8, 1.4 - Risk Assessment Matrix (major risks, relative likelihood, impact): 1. Strong intensification of the euro area crisis — Relative Likelihood: Medium; Impact if Realized: High. 2. Fiscal slippage and public debt build-up — Relative Likelihood: High; Impact if Realized: High. 3. Banking sector funding risks and recapitalization — Relative Likelihood: High; Impact if Realized: High. 4. Structural reform slippage — Relative Likelihood: Medium; Impact if Realized: High. 5. Protracted balance-sheet recession — Relative Likelihood: High; Impact if Realized: High. ### Staff strategic priorities and policy recommendations (summarized) - Immediate priorities: - Secure market financing for public and private sectors at affordable rates. - Complete bank restructuring using independent valuations; support viable banks; resolve non-viable banks; develop comprehensive legacy-asset strategy; upgrade supervision and resolution frameworks. - Implement medium-term fiscal consolidation with clearer measures, less front-loaded path, greater revenue role (especially indirect taxes), and protection of vulnerable spending. - Strengthen fiscal framework: fully implement Budget Stability Law provisions, improve regional transparency and reporting, move to medium-term budget framework with expenditure ceilings, and consider an independent fiscal council. - Push forward structural reforms: labor market implementation, product and service market liberalization, measures to boost productivity and competitiveness. - European-level actions emphasized: - Timely implementation of Euro area summit decisions, progress toward a banking and fiscal union, area-wide deposit insurance and resolution authority, and greater fiscal integration with risk sharing supported by stronger governance. - Eurogroup commitment of up to €100 billion (9.4 percent of GDP) as critical backstop for financial sector clean-up and confidence building. *International Monetary Fund — 2012 Article IV Report (supplementary information).* ### 1. The key policies incorporated in the Memorandum of Understanding (MoU) to ### _cr12202 - 1. The key policies incorporated in the Memorandum of Understanding (MoU) to ### Financial-sector policies in the MoU - Key policies incorporated to accompany the EFSF financial support (approved on July 20) include: - Identifying individual bank capital needs based on a comprehensive asset quality review and an independent bank-by-bank stress test. - Recapitalizing, restructuring and/or resolving weak banks. - Segregating legacy assets of weak banks into an asset management company. - Burden sharing from hybrid/subordinated-debt holders in banks receiving public capital. - Strengthening supervision and regulation. ### Financial assistance terms and implementation - The financial assistance will: - Cover estimated capital requirements with an additional safety margin, estimated as summing up to €100 billion in total. - Be disbursed in several tranches over the 18-month duration of the program. - Have an average maturity of 12½ years. - Include a first tranche of €30 billion expected to be pre-funded and kept by EFSF as a contingency. - Verification and monitoring: - The European Commission, in liaison with the ECB and EBA, will verify at regular intervals that the policy conditions are fulfilled. - The Spanish authorities have requested technical assistance from the Fund to support monitoring with regular reporting. ### Staff assessment of the MoU and banking strategy - Staff view: - The policies envisaged in the MoU are strong and in line with recommendations of the FSAP and staff report. - If fully implemented and combined with European financial assistance, the policies would substantially complete the needed restructuring of the sector. - Specific strengths: weak but viable banks to be supported; non-viable banks to be resolved; comprehensive strategy for legacy assets; upgraded supervision, crisis management and resolution framework. - It remains important to sever the adverse loop between the sovereign and the banks and mitigate short-term risks by a timely transformation of the European support into direct recapitalization. ### Fiscal sector: deficit path, measures, and implementation - Revised deficit path endorsed by the Council of the European Union (July 10): - 2012: 6.3 percent of GDP (previously 5.3) - 2013: 4.5 percent of GDP (previously 3.0) - 2014: 2.8 percent of GDP (previously 2.2) - The Council called for an average annual improvement of the structural balance of almost 2½ percent of GDP over 2012–14. - Major fiscal measures announced by Prime Minister Rajoy (July 11): - VAT: standard rate raised from 18 to 21 percent; reduced rate from 8 to 10 percent; super-reduced rate unchanged at 4 percent. A number of products moved from lower to higher rates. - Suspension of the extra payment in December to civil servants for 2012 — equivalent to nearly a monthly wage. - Removal of the mortgage income tax deduction. - Unemployment benefit reduced, with the replacement rate after six months falling from 60 to 50 percent. - Social security contributions reduced by one percentage point in 2013 and a further point in 2014. - Other fiscal and structural actions: - Central government initiated the first step in the warning procedure for several regions under the new budget stability law (July 12). - Regions to begin monthly budgetary reporting from October and a centralized fund established to support regional financing. - Measures on July 14 to liberalize retail opening hours and promotion periods, and to reduce the electricity deficit. ### Fiscal impact, projections, and risks - Staff estimates and projections: - Staff’s preliminary estimate is that the cumulative size of the package between 2012–14, as currently planned, is about 2 percent of GDP. - This should lead to deficits in 2012 and 2013 close to the revised targets, though more measures would be needed for 2014 and beyond. - Medium-term debt sustainability would improve with government debt reaching 97 percent of GDP in 2015, but declining slightly thereafter. - Expected macroeconomic effects: - The new fiscal consolidation measures are expected to have a significant impact on growth, especially in 2013. - Preliminary estimates suggest that the level of output would be lowered by about 1 percent by 2014. - Unemployment would also increase, though this might be mitigated by lower social security contributions and unemployment benefits, and the recent labor market reform. - The VAT increase, combined with electricity price increases, will lead to temporarily higher inflation. - Lower domestic demand would improve the current account, which would reach a larger surplus over the medium term, putting the net IIP on a downward path. - Prudence and commitments: - For prudence and pending further details, staff includes the full Eurogroup commitment of up to €100 billion (9.4 percent of GDP) in debt assessments. ### Context, risks, and policy priorities (staff views) - Context and risks: - Spain faces mounting market pressure, costly market access, and an unprecedented double-dip recession with high unemployment, rising public debt, and bank segments lacking capital and market access. - Downside risks dominate: market tensions could intensify, private sector deleveraging could be faster than envisaged, and fiscal consolidation may have larger than expected output costs. - Policy priorities and recommended strategy: - A commensurately ambitious policy response is required, communicated within a comprehensive medium-term strategy. - Core elements of the strategy: concrete measures to deliver needed medium-term fiscal consolidation; a clear roadmap for restructuring weak segments of the financial sector; structural reforms to support relative price adjustments and boost growth. - Short-term priority: secure market financing for both public and private sectors at affordable rates. - Timely implementation of Euro area summit decisions and progress toward a banking and fiscal union would critically help lower Spain’s borrowing costs. *International Monetary Fund — 2012 Article IV Report (supplementary information).* ### Box 1. Spain’s External Financing ### Box 1. Spain’s External Financing ### Past financing dynamics - Over the past decade, Spain’s current account deficits had been financed by private capital inflows; this came to a sudden stop in 2011. - Private flows had been the dominant source of funding even as recent years witnessed increased reliance on Eurosystem refinancing. - In 2010 the spike in ECB borrowing had been mostly temporary, and portfolio repatriation by residents had played a key role. - In the second half of 2011 and early 2012, net private capital outflows have been persistent. - The resulting financing needs, which greatly surpass current account financing needs, have been covered for a limited part by ECB intervention in the bond market (through the SMP), and to a larger extent by a surge in bank refinancing with the Eurosystem. ### End-2011 position and composition shifts - At the end of 2011, both gross external debt and the net IIP were broadly unchanged in magnitude compared to a year before. - Composition shifted significantly toward less portfolio assets and liabilities, and increased Bank of Spain liabilities to the Eurosystem. ### Staff projections and central scenario - Staff projects a gradual decline in reliance on ECB financing. - In the central scenario, ECB financing would not drop markedly before maturity of the 3 year LTROs and would still amount in 2015 to about half current levels. - A moderate decline in private sector reliance on external financing would be compensated by external asset drawdown. ### Alternative scenarios (as presented) - A resumption of private capital inflows combined with continued foreign asset drawdown, would allow ECB refinancing to be paid down by 2015. - If foreign investors were not to rollover any of their portfolio holdings of Spanish government and bank debt as they mature, reliance on ECB financing would increase and foreign asset drawdown would accelerate. - If private capital outflows were to continue at the same pace that was seen over the second half of 2011, non-resident holdings of Spanish government debt could soon drop to zero. ECB refinancing would further rise. *Source: Box 1. Spain’s External Financing, SPAIN 2012 ARTICLE IV REPORT, INTERNATIONAL MONETARY FUND.* ### 14. Continued strong implementation of a comprehensive strategy is needed to restore ### _cr12202 - 14. Continued strong implementation of a comprehensive strategy is needed to restore ### Strategy and overarching priorities - Continued strong implementation of a comprehensive strategy is needed to restore confidence so that imbalances can be unwound smoothly and jobs and growth fostered. - Strategy components highlighted: - Strengthen the finances of the government and finalize the banking reform. - Use the financial sector backstop to finance the clean-up, restructuring, and recapitalization of weak segments of Spain’s banking sector once and for all. - Improve labor and product market functioning to support household incomes, fiscal consolidation, banks’ asset quality, and social backing for reform. - Build on recent labor market reform to reverse misalignment in prices and wages; gains in employment and external competitiveness will be gradual. - Communicate the package clearly and cohesively. ### European-level actions and implications - Immediate euro area needs: ensure adequate bank funding and mitigate contagion. - Lasting resolution requires a convincing and concerted move toward a complete and robust EMU. - Summit agreement (June 28–29) contains significant positive steps that, if implemented in full, will help break adverse links between sovereigns and banks. - Complementary actions needed: deeper fiscal integration and a full-fledged banking union, including an area-wide deposit insurance and resolution authority, and greater fiscal integration with risk sharing supported by stronger governance. - Eurogroup commitment referenced: up to €100 billion (9.4 percent of GDP). ### Financial sector: recent developments and vulnerabilities - Bank funding and market stress: - 3-year LTROs provided temporary relief; Spanish banks drew heavily from these operations. - Bank issuance virtually stopped since mid-2011; spreads soared; interbank tension rose. - Domestic retail deposits have somewhat declined. - Asset quality and capital: - Nonperforming loans reached 8.7 percent of gross loans in April. - Including assets repossessed from developers and households, impaired loans amount to about 12 percent of gross loans. - Core capital ratio buttressed from less than 7 percent in mid-2008 to about 9 percent (including state support). - Provision and specific capital buffer requirements against real estate were further increased in February and May, amounting to about 7 percent of GDP. - This would bring the coverage of the total problematic portfolio to about 70 percent. - Banks were required to transfer real estate foreclosed assets into asset management subsidiaries. - Restructuring progress and sector consolidation: - By end-2012, ten institutions will have been resolved since 2008. - Number of former savings banks reduced to 8 (from 45 at the beginning of the crisis). - Bank employees reduced by 11 percent; branches reduced by 13 percent. - Authorities and the industry (via the Deposit Guarantee Fund) have outstanding funding and capital support amounting to about 9 percent of GDP. - In early May, the FROB intervened the holding company of the fourth largest bank, taking a 46 percent ownership. - Liquidity and funding risks: - Spanish banks face €158 billion (medium- and long-term) debt redemption in 2012–13. - System-level liquidity buffers appear sufficient, but collateral posted at the ECB is vulnerable to ratings downgrades and margin calls; asset encumbrance for some banks is high and capacity to generate new collateral is weakening. - Phasing-out of ECB funding will likely prove problematic if market access does not improve and reliance on wholesale funding is not reduced. - Liquidity stress tests indicate liquidity risk can potentially become the biggest risk should ECB support not be renewed. ### Stress tests and capital need estimates - FSAP stress test results and caveats: - Under the adverse scenario, the largest banks would be sufficiently capitalized to withstand further deterioration, while several banks would need to increase capital buffers by about 4 percent of GDP to comply with the Basel III transition schedule (core tier 1 capital of 7 percent). - For a core tier 1 of 10 percent in the baseline scenario, recapitalization needs would be around 5 percent of GDP. - Independent consultants reported in June a potential capital need under an adverse scenario of around 5–6 percentage points of GDP. - Important caveats: feedbacks between banking system distress and economic performance cannot be fully captured; capital needs would be larger when including restructuring costs and reclassification of loans identified in independent valuations. - A more definitive estimate must await results of the independent valuations. ### Final phase of banking reforms: recommended actions - Independent valuation: - Assure quality and transparency of independent valuations and stress tests (inclusion of staff of independent institutions to advise is encouraging). - Triage: - Require banks quickly to meet additional needs for higher provisions and capital, drawing on the backstop as needed. - Triage banks into: (1) those that do not need support, (2) viable banks needing government support subject to tightly-monitored restructuring plans, and (3) non-viable banks. - Dealing with intervened banks: - New management of the fourth largest bank should quickly present detailed restructuring strategy and timetable. - Announce strategy for other intervened banks, including restructuring plans and estimated cost of government support. - Consider strengthening the state’s ability to manage large stakes and enhance ability to eventually exit and benefit from sales. - Using the backstop: - Exact cost to the government depends on valuations, restructuring costs, and strategy; even if cost reached full Eurogroup commitment of €100 billion, this would remain manageable from a debt sustainability perspective, provided envisaged fiscal adjustment is undertaken. - Legacy assets: - Announce goal of dealing comprehensively with legacy real estate assets; finalize options after independent valuations. - Liquidity measures: - Banks should take full advantage of widened collateral eligible for repo-operations. - BdE should streamline and expedite procedures to facilitate prepositioning of collateral by banks. ### Supervisory and resolution framework upgrades - Strengthen timeliness and cost-effectiveness of remedial action by: - Introducing amendments to allow overriding shareholders’ rights, partial transfer of assets and liabilities, allocation of losses to left-behind creditors, conversion of some categories of bank debt into equities, and special administrative bank insolvency and liquidation procedures. - Allow FROB to use more rapid and flexible mechanisms than current auction procedures to dispose of an intervened bank if systemic considerations arise. - FSAP main recommendations (selected): - Strengthen remedial actions and sanctioning powers of banking and securities regulators. - Provide operational and regulatory independence to banking and securities regulators and financial-budgetary independence to insurance and securities regulators. - Establish a risk-based regulatory framework for the insurance sector and monitor potential risk build-up. - Develop regular testing and contingency plans to strengthen resilience of financial market infrastructures to liquidity shocks. - Put in place a more forward-looking approach to deal with weak banks and widen the array of resolution tools. - Design a clear long-term strategy on governance structures to transform savings banks into minority institutional investors over the medium-term. ### Authorities’ views (summarized) - Authorities largely concurred with staff’s analysis and see the Euro area backstop as a unique opportunity to clean up Spain’s financial sector. - Authorities prefer direct recapitalization with European funds to break adverse sovereign–bank feedback loops; they welcomed possibility of direct recapitalizations once a single supervisory mechanism is in place. - On bail-in: authorities noted high share of hybrid capital held by retail customers in Spain; a too strict bail-in could risk triggering undesirable reactions and could undermine banks’ market access. - Authorities argued ECB collateral policies are more important than Bank of Spain procedures in alleviating collateral needs. ### Fiscal policy: performance, measures, and outlook - 2011 fiscal slippage and causes: - The 6 percent of GDP target was missed by almost 3 percent of GDP. - Adjustment in 2011 was only 0.4 percent of GDP. - Slippage mainly (two-thirds) at the regional level; central government and social security also slipped substantially. - Slippage was largely revenue related; rapid deterioration of the tax base and higher than usual elasticities, particularly for indirect taxes. - Emergency package (end-December) and 2012 budget: - Government announced a package of about 1½ percent of GDP (emergency measures effective immediately while 2011 budget prolonged). - Package composition: two-thirds expenditure based (freeze on expenditure authorizations and wages) and one-third revenue based (marginal tax rates on personal and capital income and real estate raised progressively). - New revenue measures for 0.8 percent of GDP predominantly from corporate taxation and temporary increases in personal income tax rates. - Some offsetting measures made the package closer to 1 percent of GDP (reinstated mortgage deduction for housing, extension of lower VAT rate on housing transactions, small pension increase). - Some measures temporary, covering first two years of legislature (increase in personal income tax, revaluation of property taxes). - 2012 consolidation targets and risks: - Initial SGP target for 2012 was 4.4 percent of GDP; revised target of 5.3 percent of GDP (structural improvement of some 4 percent of GDP) remains highly ambitious. - Expenditure adjustment included ministerial cuts of 17 percent on average, focused on lower capital expenditures and goods and services. - Measures to cut health and education expenditures by about 1 percent of GDP, with impact mostly at the subnational level. - Clearing of subnational arrears through creation of a special fund financed by bank borrowing implies a debt increase of around 3½ percent of GDP. - Staff’s assessment and recommended additional measures: - Further substantial slippage likely in 2012 given underlying revenue weakness and short implementation timeframe. - Staff expects an overall deficit of around 7 percent of GDP, a deviation with respect to target of around 1 ½ percent of GDP. - To avoid structural slippage while acknowledging weak growth, staff suggests immediately taking additional measures of at least 1 percent of GDP on a full year basis to reach a 2012 deficit of about 6 ¼ to 6 ½ percent of GDP. - Possible measures include eliminating some VAT exemptions, raising VAT rates (especially reduced rates) and other indirect taxes, taxing the thirteenth salary, and cutting fourth quarter capital expenditure. *Source: _cr12202 - 14. Continued strong implementation of a comprehensive strategy is needed to restore* ### 28. Achieving the medium term fiscal targets will also be very challenging, but critical for ### _cr12202 - 28. Achieving the medium term fiscal targets will also be very challenging, but critical for ### Fiscal outlook and debt sustainability - Reaching a primary surplus of about 2-3 percent of GDP should allow maintaining debt at manageable levels. - The bulk of the planned consolidation from 2013 is based on expenditure savings, many of which are yet to be specified. - The revenue to GDP ratio is projected in the SGP to barely rise over the period, though indirect taxes are projected to grow and social security contributions to fall after an initial increase in 2012. - Primary spending is projected to fall by almost 4 percent of GDP. Only a part of this reduction has been linked to specific measures (such as raising co-payments on prescription drugs and increasing class size); the bulk is to come from reviews of current spending at all levels of government and rationalization of spending responsibilities across different levels of government. - The evolution of the wage bill in particular is underpinned only in part by measures that would allow a significant nominal decline over time. - Interest expenditure is projected to fall by 2015 as the yield on 10-year Spanish government debt is projected by the government to decline gradually to 3.7 percent. - Under staff’s baseline, deficits remain high. Given the lack of detailed measures, staff projects the deficit to substantially overshoot targets and to fall gradually to only about 4 percent of GDP in the medium term. This, plus debt from bank recapitalization and financing regional arrears, would lead to debt surpassing 100 percent of GDP in the medium term. ### Staff recommendations to strengthen the medium-term fiscal plan - Overall guidance: Staff believes the medium-term fiscal plan should be strengthened around three dimensions: Path, Composition, and Certainty. - Path: - The deficit path envisaged in the SGP should be less front-loaded, in agreement with European partners. - The medium-term targets are broadly appropriate, but a smoother path would be more desirable during a period of extreme weakness, when multipliers are likely to be particularly large and the tax base soft, to reduce the risk of creating a negative feedback loop with growth and NPLs. - Such a smoother path should also be embedded in a prudent macroeconomic framework. - Composition: - Given the size of the needed consolidation, no options should be ruled out. Revenue measures should play a larger role. - Considerable scope exists to reduce tax expenditures and increase indirect tax revenue by broadening the base and raising and unifying rates, especially on VAT and excises—actions that should be taken now. - Reducing social security contributions to induce an internal devaluation is desirable, but should be contingent on first reducing the deficit (to, say, below 3 percent of GDP). - The reintroduced deduction for mortgage payments should be eliminated. - Measures should deliver permanent and not one-off gains (for example, there should be no further amnesties or transitory rate increases). - Spending on the most vulnerable should be protected. - Certainty: - Spending reductions are planned for the right areas but will take time to identify, be difficult to implement, and their yields uncertain. - To give assurance that the envisaged savings will materialize, future public wage cuts to reduce the wage bill and VAT/excise increases could be legislated now and only cancelled if the revised targets are hit. - Privatization on remaining assets should be more aggressively pursued to give upside risk to debt projections. ### Box 5 — What is the Right Deficit Path? (core findings and comparisons) - Staff recommends a less front-loaded strategy than envisaged in the government’s Stability Program. - Front-loaded adjustment (SGP scenario) features: - The deficit target for 2011 was significantly overshot, and the 2012 target was loosened to 5.3 percent of GDP (in both scenarios a slippage of 1 percent of GDP to a 6.3 percent deficit in 2012 is assumed). - Based on Staff’s macroeconomic assumptions, the total improvement of the primary balance from 2011 to 2015 would be almost 10 percent of GDP, of which over 3 percentage points would be achieved in 2012. - Debt would peak at 94 percent of GDP in 2014. - Smoother adjustment: - Spreading the same primary balance adjustment more smoothly would imply higher deficits in the near term and higher debt. - To stabilize debt from 2014 onwards, some degree of frontloading would still be needed, but the target of a 3 percent deficit would be pushed back by one year. - A strong adjustment of the structural primary balance of more than 2 percent in 2013 (instead of 4 percent), 2 percent in 2014 and then ¾ percent every year until 2017 would allow a smoother profile, while still ensuring debt stabilization. - Debt would peak in 2014, at about 96 percent of GDP and would fall back to 93 percent of GDP in 2017. - Pros and cons: - Front-loaded strategy advantages: (1) improves deficit and debt faster, potentially boosting market confidence and reducing borrowing needs; (2) may be politically more feasible as permanent adjustment measures can be introduced early. - Front-loaded strategy disadvantage: implies most contraction when the economy is weakest, likely lowering growth compared to the baseline (using a multiplier of ½ in the first year and ¼ in the second) and raising unemployment and non-performing loans, creating a negative feedback loop with fiscal consolidation. - Smooth path can still establish credibility through pre-announcing fiscal measures, strong action in labor markets and banks, and implementation of institutional fiscal reforms. ### Quantitative fiscal path excerpts (selected figures from staff estimates) - Overall balance (percent of GDP) - SGP: 2011 -8.9, 2012 -6.3, 2013 -3.0, 2014 -2.2, 2015 -1.1 - Current policies: 2011 -8.9, 2012 -7.0, 2013 -5.9, 2014 -5.3, 2015 -5.1, 2016 -4.5, 2017 -4.4 - Smooth(er): 2011 -8.9, 2012 -6.3, 2013 -4.5, 2014 -3.0, 2015 -2.0, 2016 -1.3, 2017 -0.5 - Primary balance - SGP: -6.4, -3.1, 0.7, 1.9, 3.4 (years implicit from table) - Current policies: -6.4, -3.7, -2.0, -1.0, -0.5, 0.5, 1.0 - Smooth(er): -6.4, -3.1, -0.8, 1.1, 2.4, 3.5, 4.7 - Structural balance - SGP: -7.6, -4.7, -1.4, -0.8, -0.2 - Current policies: -7.6, -5.4, -4.2, -3.9, -4.1, -4.0, -4.3 - Smooth(er): -7.6, -4.7, -2.8, -1.6, -1.1, -0.8, -0.3 - Structural primary balance - SGP: -5.2, -1.5, 2.4, 3.3, 4.3 - Current policies: -5.2, -2.2, -0.4, 0.4, 0.4, 1.0, 1.1 - Smooth(er): -5.2, -1.5, 0.9, 2.5, 3.3, 4.0, 4.9 - General government debt (percent of GDP) - SGP: 68.5, 89.8, 93.1, 94.1, 93.6 - Current policies: 68.5, 90.3, 96.5, 100.2, 102.7, 104.4, 105.9 - Smooth(er): 68.5, 89.8, 94.1, 95.8, 95.5, 94.7, 93.3 - GDP growth (index or percent as provided) - SGP: 0.7, -2.0, -1.3, -0.1, 0.0 - Current policies: 0.7, -1.5, -0.6, 1.1, 1.5, 1.6, 1.6 - Smooth(er): 0.7, -2.0, -0.8, 0.2, 0.5, 0.5, 0.4 ### Fiscal framework reforms and implementation challenges - Recent legal changes: - A constitutional balanced budget amendment was passed in September, supported by the Budget Stability Law in February and a draft Transparency, Access to Public Information and Good Governance Law. - Laws apply to all levels of government and stipulate a structural balanced budget and a debt ratio of 60 percent of GDP by 2020, with transitional requirements in the interim, and limit expenditure growth to below that of GDP. - Monitoring and transparency requirements on subnational governments are enhanced, as are tools to sanction non-compliance (fines, withholding transfers, removal of sub-national financial autonomy). - Public officials that deliberately fail to comply with the fiscal targets in the organic law can be sanctioned, including removal and ineligibility for public office and loss of pensions. - The center is giving financing to sub-national governments, in return for greater conditionality. - Further improvements recommended: - Fully implement new provisions in the Budget Stability Law (e.g., immediate warnings and quick interventions if regions fail to respond). - Greater fiscal transparency: for example, providing monthly consolidated general government accounts on a cash basis within six weeks. Regional budgets, fiscal plans and reporting should be made more homogenous and user-friendly. - Move to a fully-fledged medium-term budget framework with expenditure ceilings and detailing measures covering at least 2013 and 2014, alongside measures that would aid sub-national consolidation (for example by introducing savings in health spending). - Create an independent fiscal council to analyze budgets, provide their key macroeconomic assumptions, develop comparative regional performance indicators, and conduct nationwide expenditure reviews of major programs. ### Box 6 — The challenge of regional fiscal adjustment (key points) - Regions have recently failed to meet their fiscal targets. Poor fiscal reporting and transparency made timely corrective measures difficult. - Cyclical revenues (including linked to real estate) have failed since the crisis but expenditure, which is over two-thirds related to structural social categories (e.g. education and health), is yet to be significantly consolidated. - Achieving the 1.5 percent of GDP regional 2012 deficit target is challenging. Regions began 2012 with a weighted average consolidation need of 2 percent of GDP (and some much more). Rebalancing plans were finished only in May, leaving little time for execution. - Central government actions: - Reduced structural expenditure mandates on health, education and other areas via two Royal Decree Laws. - Health: pharmaceutical copayment linked to income; rationalization measures introduced (e.g., requiring generics or limiting prescriptions). - Education: class sizes and tuition increased; working weeks extended; replacement rates limited; benefits reduced. - Other measures: changing public television requirements, eliminating duplicate public services and entities. - Carrots: advanced transfers, extended repayment periods, two financing facilities with favorable terms, Fund to Pay Suppliers, and relaxation of the deficit target from 1.3 percent in 2011 to 1.5 percent of GDP under the 2012 SGP. - Sticks (legal tools under new laws): warnings, non-disposition of credit decrees, dismissal of public officials, delegation of experts, regional control assumed, possibility of taking a region into national administration; these need to be used promptly. - Short-run priorities: establish legal mechanisms that ensure transparency and deliver consolidations; review rebalancing plans stringently; quickly and convincingly establish functionality and credibility of tools (warnings, non-disposition of credit decrees, dismissal of public officials); execute stronger measures promptly as law permits. ### Authorities' views - The government recognized the envisaged fiscal consolidation is very ambitious and challenging and concurred that a smoother path would have been preferable given the rapid deterioration of the economy. - They assessed that a traditional approach to fiscal multipliers might not be warranted, noting inter-temporal effects of fiscal consolidation might differ between time periods. - They agreed Spain has a low level of tax revenue and the need to take revenue measures along the path of fiscal consolidation, but considered legislating measures for the medium term difficult in the current constitutional framework. - Authorities underscored willingness to take additional measures as needed and agreed on the need to bring greater certainty and transparency to fiscal outcomes at all levels, particularly regional. - Authorities viewed initiatives including the Fund to Pay Suppliers, the Organic Budget Stability Law and the Fiscal Transparency and Good Governance Law as strengthening transparency and fiscal control, but did not agree that an independent fiscal council would be useful, citing risks of undermining existing institutions. ### Structural reforms — labor market issues - Spain urgently needs job-rich growth and further gains in competitiveness; domestic demand is likely to be structurally weak for the foreseeable future and the current account deficit needs to improve further. - Spain’s main structural problems are labor market rigidities and high unemployment, with adverse effects on aggregate demand and potential output. - Key labor market rigidities identified: - Wage rigidity: Wages react little to unemployment and are more correlated to past inflation than in other OECD economies. Wage rigidity is due to collective wage agreements automatically extended to the whole province/industry, with very restrictive opt-out clauses and widespread wage indexation. - Insufficient flexibility of working conditions: Industry or region wide collective agreements restrict firms' ability to modify working arrangements to adjust to shocks. Spain’s hours worked per employee increased since 2007, when unemployment was rising, while they fell in most OECD countries. - High labor market duality: Spain has the largest share of temporary workers in the OECD. Workers on open-ended contracts enjoy high protection and job stability, while workers on temporary contracts have low protection and face job instability. - Example: temporary employment has fallen by 34 percent since end-2007 while employment in open-ended contracts has fallen only by 6 percent. *Source: IMF Staff estimates and analysis drawn from the provided chapter.* ### Box 7. Unemployment Volatility and Labor Market Rigidities ### Box 7. Unemployment Volatility and Labor Market Rigidities ### Empirical findings on labor market rigidities and unemployment volatility - A wage Phillips curve vector autocorrection equation with five variables (labor compensation, prices, labor productivity, unemployment and work hours) is used with the G7 economies as a benchmark. - Spain’s labor compensation, relative to the G7 benchmark, exhibits: - high inertia (high responsiveness of labor compensation to a 1 percent increase in labor compensation), - high responsiveness to inflation (a high increase of labor compensation in response to a 1 percent increase in inflation), - low sensitivity to unemployment (labor compensation does not fall when the unemployment rate increases by 1 percent). - Spain’s work hours react little to labor market shocks. - These rigidities cause large increases in unemployment in response to shocks to wages or inflation. ### The February 2012 labor market reform: objectives and main elements - The reform, enacted as a decree on February 2012, aims to reduce wage and working time rigidity and firms’ internal inflexibility, increasing the sensitivity of labor costs to economic conditions. - Main elements: - Reduce duality by lowering dismissal costs of permanent workers for unfair dismissals and easing/clarifying the use of fair dismissals for firms in distress (firms facing current or prospective losses, or a persistent decline in sales); reduce procedural costs and eliminate the need for prior administrative approval for fair dismissals. Goal: make fair dismissals the regular channel to dismiss workers with permanent contracts in distressed firms, thus significantly reducing dismissal costs. - Reduce wage rigidity and firms’ internal inflexibility by giving priority to firm-level agreements over wider collective agreements; allow distressed firms to change working conditions, temporarily suspend contracts, and reduce working time; limit the automatic extension of expired collective agreements to one year. Goal: allow distressed firms to adjust wages and working time instead of dismissing workers. ### Targeted employment and training measures (and caveats) - The reform includes measures aimed at fostering job creation for youth and the long-term unemployed, and in-job training. - Several measures rely on subsidies and tax breaks, which have been used in the past with little success. - Measures judged more likely to foster job creation: - authorization for temporary employment agencies to act as private placement agencies, - enhanced flexibility of part-time work and telework. ### Implementation risks, potential enhancements, and monitoring - Success hinges on implementation; previous reforms were marginal and not widely used, partly due to interpretation by the courts. - Possible strengthening options: - reduce the difference between protection for open-ended and temporary contracts to make the labor market more inclusive, - eliminate the practice of indexation and “ultra-activity”, - better communicate new flexibility options to firms, - prepare contingency plans (for example, moving to an opt-in system for collective bargaining) if sufficient firm-level flexibility is not quickly forthcoming (should be transparently monitored). - Planned review of active employment policies should assess whether the unemployed are given sufficient training and incentives and whether subsidies (inefficient and expensive in the past) are the best alternative. - Recent measures on fighting fraud, including on unemployment benefits, should contribute to decreasing the size of the grey economy and strengthening labor policies. ### Productivity, competitiveness, and external position - Since the beginning of the crisis: - productivity per employee rose by 11 percent, largely reflecting labor shedding, - the working week increased by almost 3 percent, - wage growth slowed, helping deflate unit labor costs. - More progress in labor productivity is needed to regain competitiveness lost during the boom years and to sustain an export-led recovery; productivity gains should come from better use of resources rather than additional layoffs. - The external position remains considerably weaker than consistent with medium-term fundamentals and appropriate policy settings: - The current account had been in deficit at 3 percent of GDP at euro entry; consumption-price and unit labor cost indicators show large gaps vis-à-vis trading partners that have only partly corrected since 2008. - EBA and CGER model estimates point to REER overvaluation of 10 to 15 percent (Annex V). - Recent competitiveness improvements significantly reflect cyclical productivity gains from labor shedding; a change in relative prices is the primary way to improve the external balance while closing the output gap. - A persistent current account surplus would be appropriate to help improve the net IIP position, which would still remain very negative for many years. - External debt is too high and would increase further in gross terms if European financial assistance for bank recapitalization takes the form of a loan rather than direct equity stakes; external debt remains a major source of external vulnerability as it generates large financing needs. ### Complementary reforms and policy priorities - To improve the external position and support labor reform: - effective implementation of the labor market reform should bring down labor costs, - financial sector restructuring should help banks reduce reliance on the ECB, - delivering fiscal consolidation will contribute significantly to external adjustment. - Other structural reforms needed to support labor reform: - decisive changes in product and service markets to make Spain one of the most business-friendly internal markets, - reforms to raise growth potential and accelerate employment recovery, including helping small firms grow, deregulating the fuel sector and postal services, supporting intellectual property rights, - retail licensing eased and steps to create a common regulatory framework across regions, boost the rental market, liberalize retail hours and professional services, and eliminate the tariff deficit. - A cooperative solution is advocated: workers accept greater wage moderation, employers pass on cost savings to prices and hire, and banks recapitalize to enable faster reallocation of resources to dynamic sectors. ### Authorities’ view and early indicators - The government argued the labor reform is profound and introduces significant flexibility; acknowledged it needs time to take effect and it is too soon to assess fully. - Early indications (partial data for the first 3–4 months of 2012): - wage increases in collective agreements signed during 2012 are low, - the number of opt outs from industry/sectoral level collective agreements has increased, - severance payments for collective dismissals have fallen. - The authorities viewed their structural reform agenda as comprehensive, already underway, and helping to revive growth in the medium-term; they removed the license requirement to start small retail businesses (a process which previously took more than six months). - Authorities agreed ongoing competitiveness gains were not sufficient and that persistent current account surpluses would be needed to reduce external vulnerabilities. ### Macroeconomic context and staff assessment highlights - The economy is described as falling into an unprecedented double-dip recession, with unemployment already at 24 percent, persistent capital outflows and risks of losing market access. - Positive developments: imbalances unwinding (current account, inflation, unit labor costs); wage and price realignment should be supported by the labor market reform. - Downside risks dominate, though upside risk exists if the labor reform is successfully implemented. - Policy recommendations and priorities: - continued strong reform momentum and a clear medium-term vision, - concrete measures for medium-term fiscal consolidation and a clear roadmap for restructuring weak segments of the financial sector, - better functioning labor and product markets to support household incomes, fiscal consolidation, banks’ asset quality, and social backing for reform, - intensify reversal of price and wage misalignment, - timely implementation of Euro area summit decisions and progress towards banking and fiscal union to help lower borrowing costs. - Financial sector: complete restructuring using independent valuations, support viable but weak banks, resolve non-viable banks, develop a comprehensive strategy for legacy real estate assets, and upgrade supervision and crisis management/resolution frameworks. - Fiscal outlook and recommendations: - the cumulative size of the package between 2012–14, as currently planned, is about 2 percent of GDP; - government debt projected to reach 97 percent of GDP in 2015 (medium-term debt sustainability would improve but implementation is key); - the very ambitious deficit target for 2012 will likely be missed by a substantial margin; slippage should not be made up in a compressed timeframe given weak growth; - the medium-term fiscal plan should be strengthened, made less front loaded, contain specific measures, with revenue (especially indirect taxes) playing a larger role immediately; - improve fiscal framework: fully use new provisions to control regional government finances, greatly improve transparency of regional accounts, make the budget more medium-term oriented, and consider an independent fiscal council. *Source: Box 7, "Unemployment Volatility and Labor Market Rigidities", Spain 2012 Article IV Report* ### 52. It is proposed to hold the next Article IV consultation on the regular 12-month cycle. ### _cr12202 - 52. It is proposed to hold the next Article IV consultation on the regular 12-month cycle. ### Scheduling - It is proposed to hold the next Article IV consultation on the regular 12-month cycle. ### On the economic outlook (staff assessment) - Quoted staff text: - “Staff expects the new fiscal consolidation measures to have a significant impact on growth, especially in 2013. While the large role of indirect taxes should lead to a relatively low multiplier, preliminary estimates suggest that the level of output would be lowered by about 1 percent by 2014. Unemployment would also increase, although this might be mitigated by the effect of lower social security contributions and unemployment benefits, as well as the recent labor market reform. The VAT increase, combined with electricity price increases, will also lead to temporarily higher inflation. Lower domestic demand would further improve the current account, which would reach a larger surplus over the medium term, putting the net IIP on a downward path”. ### Key indicators and projections (select extracts) - Gross domestic product (annual percent change): 3.6, 4.1, 3.5, 0.9, -3.7, -0.1, 0.7, -1.5, -0.6, 1.1, 1.5, 1.6, 1.6 - Private consumption (annual percent change): 4.1, 4.0, 3.5, -0.6, -4.3, 0.8, -0.1, -1.5, -0.1, 0.9, 1.0, 1.1, 1.1 - Public consumption (annual percent change): 5.5, 4.6, 5.6, 5.9, 3.7, 0.2, -2.2, -6.9, -5.5, -1.2, -0.4, -0.2, -0.1 - Gross fixed investment (annual percent change): 7.1, 7.1, 4.5, -4.7, -16.6, -6.3, -5.1, -7.5, -1.1, 0.6, 1.0, 1.4, 1.8 - Net exports (contribution to growth): -1.7, -1.4, -0.8, 1.5, 2.8, 0.9, 2.5, 2.4, 0.7, 0.7, 0.7, 0.7, 0.6 - Exports of goods and services (annual percent change): 2.5, 6.7, 6.7, -1.0, -10.4, 13.5, 9.0, 1.7, 4.6, 4.5, 4.9, 4.9, 4.9 - Imports of goods and services (annual percent change): 7.7, 10.2, 8.0, -5.2, -17.2, 8.9, -0.1, -6.2, 2.4, 2.8, 3.0, 3.4, 3.7 - Potential output growth: 2.7, 2.8, 2.5, 2.3, 1.3, 0.6, 0.5, -0.4, -0.4, -0.1, 0.2, 0.6, 0.8 - Output gap (percent of potential): 1.5, 2.8, 3.8, 2.3, -2.8, -3.4, -3.2, -4.3, -4.4, -3.3, -2.1, -1.2, -0.4 - Unemployment rate (in percent): 9.2, 8.5, 8.3, 11.3, 18.0, 20.1, 21.6, 24.7, 24.4, 23.8, 22.9, 21.7, 20.3 - HICP (average): 3.4, 3.6, 2.8, 4.1, -0.2, 2.0, 3.1, 1.6, 1.0, 1.2, 1.3, 1.4, 1.4 - Current account balance (percent of GDP): -7.4, -9.0, -10.0, -9.6, -4.8, -4.5, -3.5, -2.0, -1.1, -0.6, 0.0, 0.8, 1.4 - Net international investment position: -56, -66, -78, -79, -94, -89, -92, -95, -95, -93, -90, -87, -83 - General government balance (percent of GDP): 1.3, 2.4, 1.9, -4.5, -11.2, -9.3, -8.9, -7.0, -5.9, -5.3, -5.1, -4.5, -4.4 - Primary balance (percent of GDP): 3.1, 4.0, 3.5, -2.9, -9.4, -7.4, -6.4, -3.7, -2.0, -1.0, -0.5, 0.5, 1.0 - General government debt (percent of GDP, Maastricht): 40.2, 53.9, 61.2, 68.5, 90.3, 96.1, 268.5, 90.3, 100.2, 102.7, 104.4, 105.9 - (Note: the table shows "General government debt 43.2 39.7 36.3 40.2 53.9 61.2 68.5 90.3 96.5 100.2 102.7 104.4 105.9" and similar sequencing across cells.) - Private sector debt (percent of GDP): 245, 273, 286, 286, 289, 294, 273, 267, 263, 258, 254, 250, 247 - Household savings (percent of disposable income): 10.8, 10.2, 10.4, 13.6, 18.5, 13.9, 11.6, 10.5, 10.8, 11.0, 11.2, 11.5, 12.2 - Credit to private sector (percent): 27.2, 25.4, 16.7, 6.4, -1.6, 0.8, -3.2, -5.4, -5.2, -1.6, 2.1, 2.5, 2.7 ### Observations drawn in figures and tables (select) - Output started to fall again in 2011Q4 and has diverged from the euro area recovery. - Domestic demand contracted while exports rebounded more than imports, giving a positive net exports contribution that cushioned the output contraction in the double dip. - Headline inflation is gradually declining and core inflation is now below the euro area average. - Spain’s vulnerabilities stem from accumulated imbalances, including large external liabilities, which would require substantial adjustments to unwind. - Deleveraging has started, but could be prolonged and continue to weigh on growth. - Private sector is adjusting through a sharp increase in savings, while public savings are lagging. - House prices have fallen; the construction boom is over. - While ECB 3-year LTROs have contributed to mitigate liquidity pressure, market indicators of Spanish government debt have continued worsening, as have banks’ cost of protection and equity prices. - Spain has the largest share of temporary workers among the OECD economies, employment is the most procyclical among the OECD economies, and employment volatility relative to GDP is highest. *Source: SPAIN 2012 ARTICLE IV REPORT (staff text, figures, and tables as provided).* ### 1. Direct taxes2.83.83.60.03.90.93.83.83.94.04.14.2 ### _cr12202 - 1. Direct taxes2.83.83.60.03.90.93.83.83.94.04.14.2 ### Regional Fiscal Operations and Public Finance (Table 6: Spain: Regional Fiscal Operations 2010-2017) - Revenue components (percent of GDP or levels as presented): - 1. Direct taxes: 2.8 3.8 3.6 0.0 3.9 0.9 3.8 3.8 3.9 4.0 4.1 4.2 - Inheritance and gift tax: 0.3 0.2 0.2 ...... 0.1 0.2 0.2 0.3 0.3 0.4 0.4 - Personal income tax: 2.5 3.4 3.4 ...... 0.8 3.6 3.6 3.6 3.7 3.7 3.8 - 2. Indirect taxes: 3.2 4.4 4.8 0.1 4.8 1.0 4.4 4.5 4.6 4.8 4.9 5.1 - Capital gains & transfers: 0.8 0.6 0.7 ...... 0.1 0.6 0.6 0.7 0.7 0.8 0.8 - Value added tax: 1.3 2.3 2.6 ...... 0.5 2.3 2.3 2.4 2.4 2.5 2.5 - Excise duties: 1.1 1.4 1.4 ...... 0.3 1.5 1.5 1.6 1.6 1.7 1.7 - 3. Fees, public prices: 0.5 1.2 0.4 0.0 0.4 0.1 0.4 0.4 0.5 0.5 0.6 0.6 - 4. Current transfers: 5.5 2.8 3.2 0.1 3.0 1.0 2.9 2.9 2.9 2.9 2.9 2.9 - 5. Property income: 0.0 0.0 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - Current Revenue: 12.1 12.2 12.1 0.3 12.3 3.0 11.5 11.6 11.9 12.2 12.5 12.8 - 6. Divestment: 0.0 0.0 0.1 0.1 0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - 7. Capital transfers: 0.7 0.5 0.6 0.0 0.6 0.1 0.5 0.5 0.5 0.5 0.5 0.5 - Compensation fund: 0.1 0.1 0.1 ...... 0.0 0.0 0.1 0.1 0.1 0.1 0.1 0.1 - Other (capital): 0.5 0.4 0.5 ...... 0.0 0.4 0.4 0.4 0.4 0.4 0.4 0.4 - Capital Revenue: 0.7 0.6 0.7 0.2 0.7 0.1 0.5 0.5 0.5 0.5 0.5 0.5 - Total Revenue: 12.8 12.8 12.9 0.4 13.0 3.1 12.0 12.2 12.5 12.8 13.0 13.3 - Expenditure components: - 1. Wages: 5.6 5.3 5.3 0.3 5.0 1.2 5.1 5.0 5.0 5.0 5.0 5.0 - 2. Goods and Services: 2.7 2.6 2.5 0.4 3.2 0.6 2.5 2.4 2.4 2.4 2.4 2.4 - 3. Interest expenditure: 0.3 0.4 0.6 0.0 0.6 0.1 0.6 0.7 0.8 0.8 0.9 0.9 - 4. Current transfers: 4.3 5.0 3.9 0.3 4.7 0.9 4.9 4.8 4.8 4.8 4.8 4.8 - 5. Contingency fund: 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.0 - Current Expenditure: 12.8 13.4 12.3 1.1 13.6 2.8 13.1 12.9 12.9 13.0 13.0 13.1 - 6. Capital investment: 0.9 0.6 0.8 0.1 0.7 0.1 0.8 0.8 0.8 0.8 0.8 0.8 - 7. Capital transfers: 1.2 1.0 1.0 0.2 0.9 0.1 1.0 0.9 0.9 0.9 0.9 0.9 - Capital Expenditure: 2.1 1.6 1.8 0.3 1.6 0.2 1.8 1.7 1.7 1.7 1.7 1.7 - Total Expenditure: 15.0 15.0 14.2 1.3 15.2 3.0 14.9 14.6 14.6 14.7 14.7 14.8 - Balances and adjustments: - Balance (budget accounting): -2.2 -2.2 -1.3 1.8 -2.2 0.1 -2.9 -2.4 -2.2 -1.9 -1.7 -1.4 - National Accounting Adj. 5/: -0.8 -1.1 ...... 0.7 -0.1 0.7 -0.1 -0.1 -0.1 -0.1 -0.1 - Balance (national accounting): -2.9 -3.3 ...... -1.5 0.0 -2.2 -2.5 -2.3 -2.0 -1.8 -1.5 - Primary balance: -2.7 -2.8 #...... -0.9 0.1 -1.6 -1.8 -1.5 -1.2 -0.9 -0.6 - Memorandum: - Debt: 11.4 13.0 ............ 16.8 19.2 21.1 22.5 23.7 24.5 - Real regional GDP growth: -0.1 0.7 ............ -1.5 -0.5 1.1 1.5 1.6 1.6 - Notes highlight: Sources: Spanish authorities; and IMF staff estimates. 2/ Consolidated 2012 regional budgets presented in budget accounting, corrected by measures presented in PEFs for 2012. 5/ Adjustment to bring budget accounting to ESA95 national accounting, for 2012 assumes a one-off positive adjustment in PEFs. 4/ Financial-Economic Plans for 2012... ### Balance of Payments (Table 7: Spain: Balance of Payments) - Current Account (billions of euro): -51 -47 -38 -21 -12 -7 0 9 17 - Trade Balance of goods and services (billions of euro): -17 -20 -6 15 24 34 45 54 63 - Exports of goods and services: 253 288 325 337 357 378 403 430 459 - Exports of goods: 164 194 223 231 245 260 277 296 316 - Exports of services: 89 94 109 106 111 118 126 134 143 - Imports of goods and services: -269 -308 -330 -322 -332 -344 -358 -375 -395 - Imports of goods: -206 -241 -262 -257 -265 -274 -284 -297 -313 - Imports of services: -64 -66 -68 -65 -67 -71 -74 -78 -82 - Balance of factor income: -26 -20 -26 -30 -31 -35 -39 -39 -40 - Balance of current transfers: -8 -7 -6 -6 -6 -6 -6 -6 -7 - Capital Account: 46 54 44 44 45 - Financial Account (billions of euro): 52 43 34 19 8 2 -4 -13 -21 - Foreign Direct Investment: -2 2 -6 16 14 15 15 15 16 - Portfolio Investment: 51 34 -29 -2 9 7 28 27 37 -4 -10 (as given in sequence) - Other Investment: 10 -17 61 55 -35 -39 -56 -24 -27 - of which EFSF/ESM: .........10000000 - Financial Derivatives: -692500000 - Reserves In(+)/Outflows(-): -2 -1 -1 000000 - Errors and Omissions: -6 -2 -2 -1 00000 - Current Account (percent of GDP): -4.8 -4.5 -3.5 -2.0 -1.1 -0.6 0.0 0.8 1.4 - Trade Balance of goods and services (percent of GDP): -1.6 -1.9 -0.5 1.4 2.3 3.1 4.0 4.7 5.4 - Exports of goods and services: 24.1 27.3 30.2 31.6 33.5 34.7 36.0 37.3 38.8 - Exports of goods: 15.7 18.4 20.7 21.8 23.0 23.9 24.8 25.7 26.7 - Exports of services: 8.5 8.9 9.5 9.9 10.5 10.8 11.3 11.7 12.1 - Imports of goods and services: -25.7 -29.3 -30.8 -30.3 -31.2 -31.6 -32.0 -32.6 -33.4 - Imports of goods: -19.6 -23.0 -24.4 -24.2 -24.8 -25.1 -25.4 -25.8 -26.4 - Imports of services: -6.1 -6.3 -6.3 -6.1 -6.3 -6.5 -6.6 -6.8 -7.0 - Balance of factor income (pct GDP): -2.5 -1.9 -2.4 -2.8 -2.9 -3.2 -3.4 -3.4 -3.4 - Balance of current transfers (pct GDP): -0.8 -0.7 -0.6 -0.6 -0.6 -0.6 -0.6 -0.6 -0.6 - Financial Account (pct of GDP): 5.0 4.1 3.2 1.7 0.7 0.2 -0.4 -1.1 -1.8 - Foreign Direct Investment (pct GDP): -0.2 0.2 -0.6 1.5 1.4 1.3 1.3 1.3 1.3 - Portfolio Investment (pct GDP): 4.8 3.3 -2.7 -14.8 2.7 2.5 3.3 -0.4 -0.8 - Other Investment (pct GDP): 1.0 -0.1 7.1 14.6 -3.3 -3.6 -5.0 -2.1 -2.3 - of which EFSF/ESM: .........9.4 0.0 0.0 0.0 0.0 0.0 - Financial Derivatives (pct GDP): -0.5 0.8 0.2 0.5 0.0 0.0 0.0 0.0 0.0 - Reserves In(+)/Outflows(-) (pct GDP): -0.1 -0.1 -0.9 0.0 0.0 0.0 0.0 0.0 0.0 - Errors and Omissions (pct GDP): -0.5 -0.2 -0.1 -0.1 0.0 0.0 0.0 0.0 0.0 - Net International Investment Position: -93.7 -89.4 -92.1 -94.6 -95.1 -93.3 -90.5 -86.8 -82.7 ### International Investment Position (Table 8: Spain: International Investment Position, 2005-11) - Selected levels (billions of euro) and percent of GDP: - International Investment Position (billions): -505 -648 -823 -863 -982 -940 -989 - Direct Investment (billions): -67 -19 -31 -42 116 - Assets (billions): 259 331 395 424 434 491 496 - Liabilities (billions): 326 350 398 423 439 469 480 - Portfolio Investment (billions): -274 -509 -649 -604 -694 -648 -616 - Assets (billions): 455 456 438 354 374 313 258 - Liabilities (billions): 728 965 1087 95? 810 689 608 74 (as presented) - Other Investment (billions): -237 -206 -232 -305 -327 -346 -314 - Assets (billions): 268 325 379 387 370 373 399 - Liabilities (billions): 505 531 611 692 697 719 713 - Bank of Spain (billions): 729 679 514 430 -81 - o/w Reserve Assets: 15 15 13 15 20 24 36 - International Investment Position (percent of GDP): -55.6 -65.8 -78.1 -79.3 -93.7 -89.4 -92.1 - Direct Investment (pct GDP): -7.4 -2.0 -0.2 0.1 -0.4 2.0 1.5 - Assets (pct GDP): 28.5 33.6 37.5 39.0 41.5 46.7 46.2 - Liabilities (pct GDP): 35.8 35.6 37.8 38.9 41.9 44.6 44.7 - Portfolio Investment (pct GDP): -30.1 -51.6 -61.6 -55.5 -66.2 -61.6 -57.4 - Assets (pct GDP): 50.0 46.2 41.6 32.6 35.7 29.8 24.0 - Liabilities (pct GDP): 80.1 97.9 103.2 88.1 101.9 91.4 81.4 - Other Investment (pct GDP): -26.0 -20.9 -22.0 -28.1 -31.2 -32.9 -29.3 - Assets (pct GDP): 29.5 33.0 36.0 35.5 35.3 35.4 37.2 - Liabilities (pct GDP): 55.5 53.9 58.0 63.6 66.5 68.4 66.5 - Bank of Spain (pct GDP): 7.9 9.7 7.5 4.7 4.2 2.9 -7.5 - o/w Reserve Assets (pct GDP): 1.6 1.5 1.2 1.3 1.9 2.3 3.4 - Memorandum: - Nominal GDP (Euro billions): 909 986 1053 1088 1048 1051 1073 - Source: Bank of Spain. ### Monetary Survey and Banking Sector Indicators (Table 9: Spain: Monetary Survey, 2008-2017) - Aggregated Balance Sheet of MFIs (Billions of euros, end of period): - Assets: 3,409 3,447 3,471 3,621 3,724 3,623 3,581 3,561 3,578 3,601 - Cash: 998 777 778 8 - Deposits at the ECB: 543 527 513 432 311 513 11 3 11 3 - Claims on non MFIs: 1,924 1,906 1,936 1,887 1,797 1,712 1,690 1,720 1,761 1,808 - General government: 536 479 89 99 61 101 104 105 107 - Private sector (total): 1,871 1,842 1,857 1,797 1,700 1,611 1,584 1,616 1,656 1,701 - Corporates: 952 915 896 840 781 736 721 739 761 786 - Households and NPISH: 880 873 876 857 823 783 771 785 802 821 - Shares and other equity: 939 910 316 317 216 415 915 314 914 6 - Securities other than shares: 412 515 520 544 605 597 590 589 585 581 - Claims on non-residents: 421 420 374 386 405 398 395 393 394 396 - Other assets: 278 245 293 381 492 506 510 496 484 478 - Liabilities: 3,409 3,447 3,471 3,621 3,724 3,623 3,581 3,561 3,578 3,601 - Capital and reserves: 242 270 283 367 476 473 469 467 468 472 - Borrowing from the ECB: 102 91 62 17 23 3 93 2 230 514 613 1113 (as presented) - Deposits of non MFIs: 1,656 1,694 1,728 1,650 1,558 1,522 1,526 1,563 1,608 1,664 - Public sector credit: 4.9 6.2 7.5 8.3 9.1 9.5 9.8 9.3 9.1 9.1 - Money and Credit (levels and percent of GDP): - Broad Money: 1,181 1,163 1,140 1,121 1,106 1,104 1,123 1,148 1,176 1,203 - Intermediate money: 1,013 1,035 1,031 977 964 962 979 1,001 1,025 1,049 - Narrow money: 478 528 515 506 499 498 507 518 530 543 - Monetary base: 134 127 122 152 150 149 152 155 159 163 - Percent of GDP indicators: - Broad Money (pct GDP): 108.6 111.0 108.4 104.5 104.0 103.5 103.1 102.6 102.1 101.7 - Private sector credit (pct GDP): 172.0 175.8 176.7 167.4 159.8 151.1 145.3 144.4 143.9 143.7 - Corporates (pct GDP): 87.5 87.3 85.2 78.3 73.4 69.0 66.1 66.0 66.1 66.4 - Households and NPISH (pct GDP): 80.9 83.4 83.4 79.8 77.3 73.5 70.8 70.2 69.7 69.4 - Public sector credit (pct GDP): 4.9 6.2 7.5 8.3 9.1 9.5 9.8 9.3 9.1 9.1 - Percentage changes: - Broad Money (percent change): 10.1 -1.5 -2.0 -1.6 -1.3 -0.3 1.8 2.2 2.4 2.3 - Private sector credit (percent change): 6.4 -1.6 0.8 -3.2 -5.4 -5.2 -1.7 2.1 2.5 2.7 - Corporates (percent change): 6.6 -3.9 -2.1 -6.2 -7.1 -5.8 -2.0 2.5 3.0 3.2 - Households and NPISH (percent change): 4.8 -0.8 0.3 -2.2 -4.0 -4.8 -1.5 1.8 2.2 2.4 - Public sector credit (percent change): 23.5 22.1 21.9 13.6 8.0 5.0 5.0 -2.0 1.0 2.0 - Memo items: - Loans to deposits (%, other resident sector): 158.0 151.5 149.2 150.0 150.0 145.8 142.9 142.4 141.8 140.7 - Deposits (% change, private sector): 14.3 2.0 2.3 -4.1 -5.5 -2.4 0.3 2.4 2.9 3.5 - Wholesale market funding (% change): 4.6 6.0 -8.8 -1.4 -9.5 -4.3 -2.5 14.7 -1.4 -1.4 - Wholesale market funding (% assets): 23.8 24.9 22.6 21.3 18.8 18.5 18.2 21.0 20.6 20.2 - Capital and reserves (% total assets): 7.1 7.8 8.1 10.1 12.8 13.1 13.1 13.1 13.1 13.1 ### Risk Assessment Matrix (Table 10) - Major sources of risk, relative likelihood, and impact if realized: 1. Strong intensification of the euro area crisis - Relative Likelihood: Medium - Key risks: Market stress could intensify; deleveraging and fiscal drag could affect euro area outlook; knock-on effects on financial sector and volatility. - Impact if Realized: High — lower export demand, inward financial spillovers, indirect effects via deleveraging and uncertainty. 2. Fiscal slippage, and public debt build-up - Relative Likelihood: High - Key risks: Implementation of Spanish fiscal adjustment plans may falter; regional fiscal slippages; contingent liabilities could increase debt. - Impact if Realized: High — exacerbate non-resident outflows; widen sovereign borrowing costs and impair market access. 3. Banking sector funding risks and recapitalization - Relative Likelihood: High - Key risks: Banks’ market financing may not be regained quickly; capital needs larger than expected; real estate decline could raise NPLs. - Impact if Realized: High — liquidity deterioration could require ELA; mobilization of large backstop mitigates capital need impact; debt impact muted if ESM implements direct recapitalization. 4. Structural reform slippage - Relative Likelihood: Medium - Key risks: Social impact of austerity could erode reform support. - Impact if Realized: High — reforms could stall, undermining confidence and dragging potential growth. 5. Protracted balance-sheet recession - Relative Likelihood: High - Key risks: High private sector debt could lead to prolonged deleveraging. - Impact if Realized: High — dampen activity short and medium-term; risk deflation and worsened debt sustainability for private and public sectors. - Note: RAM shows relatively low probability events that could materially alter the baseline. The relative likelihood is staff’s subjective assessment. 1/ 2/ 3/ annotations included in source. ### Authorities’ Response to Past IMF Policy Recommendations (Table 11) - IMF 2011 Article IV Recommendations and authorities’ assessed response: - Fiscal policy I: Take additional measures if near-term risks materialize (cuts in current and investment spending; increase in VAT and excise rates especially on petroleum products). - Authorities’ Response: Marginally consistent - Actions noted: Package of additional measures in December including broad-based freeze on expenditure authorizations, extension of wage freeze, progressive increase of marginal tax rates on personal and capital income as well as real estate, and an ambitious 2012 budget. - Fiscal policy II: Improve fiscal frameworks (transparency, subnational compliance, independent fiscal council, periodic public-sector-wide review). - Authorities’ Response: Broadly consistent - Actions noted: Constitutional balanced budget amendment passed in September 2011; organic law for budget stability and financial sustainability; Transparency, Access to Public Information and Good Governance Law introduced. - Financial sector policy: Complete financial sector reform, address viability of weak banks, boost capital and provision buffers, review of loan loss estimates by independent firm. - Authorities’ Response: Broadly consistent - Actions noted: Provisions and capital requirements raised; fourth largest bank intervened; independent valuations being conducted. - Labor market reform: Strengthen labor market reform to reduce unemployment (decentralize collective bargaining, eliminate inflation indexation, lower severance payments, retraining, youth employment). - Authorities’ Response: Broadly consistent - Actions noted: Royal decree law on labor market reform enacted in February 2012 with measures prioritizing firm-level agreements, reducing severance pay for unfair dismissal, easing fair dismissal, targeted measures for youth and long-term unemployed, and in-job training. - Note: 1/ Significant policy developments occurred after this Staff Report had been issued to the Board, discussed in attached Staff Supplement. *Sources: Spanish authorities; Bank of Spain; IMF staff estimates (as presented in the source content).* ### ANNEX I. FISCAL AND EXTERNAL SUSTAINABILITY ### ANNEX I. FISCAL AND EXTERNAL SUSTAINABILITY ### Large near-term public sector and external funding needs - Gross general government debt financing needs would exceed 20 percent of GDP in 2012 and 2013. - Redemption of outstanding securities alone amounts to 7.5 percent of GDP in the second half of 2012, and 11 percent in 2013. - As of early July, the central government had raised 65 percent of projected gross medium and long term debt issuance for 2012. - Average maturity of central government debt is 6 ½ years in 2011; average maturity at the subnational level has decreased significantly in some instances. - 10 year spreads with respect to the German Bund were above 570 basis points as of early July. - European financial assistance for weak segments of the financial sector agreed by the Eurogroup up to €100 billion (9.4 percent of GDP) to be channeled through the FROB; staff assumed this amount for the debt sustainability analysis. ### Baseline (current policies) projections for public debt - Under unchanged policies and assuming the FROB loan reaches the full €100 billion, public debt DSA projects the debt-to-GDP ratio to increase to 106 percent of GDP in 2017. - Baseline public sector debt trajectory (selected years, percent of GDP): - 2011: 61.2 (from table: 2006–2017 row shows 2011 = 61.2) - 2012: 68.5 - 2013: 90.3 - 2014: 98.2 - 2015: 100.2 - 2016: 102.7 - 2017: 104.4 and current policies scenario value 105.9 (table: final column shows 105.9) - Gross financing need (percent of GDP) under baseline: 12.0 (2011), 11.0 (2012), 16.8 (2013), 19.6 (2014), 21.1 (2015), 24.8 (2016), 22.7 (2017) — table A1 provides annual series (label: Gross financing need 7/). - Public-sector foreign-currency denominated debt: 0.7 percent of GDP (2017, table A1: o/w foreign-currency denominated = 0.7). ### Identified debt-creating flows and fiscal assumptions (baseline) - Change in public sector debt (percent of GDP): series includes -3.5 (2006), -3.4 (2007), 3.9 (2008), 13.8 (2009), 7.2 (2010), 7.3 (2011), 2.1 (2012), 8.2 (2013), 3.7 (2014), 2.4 (2015), 1.7 (2016), 1.6 (2017). - Primary deficit (percent of GDP): -3.7 (2006), -3.5 (2007), 2.6 (2008), 9.4 (2009), 7.4 (2010), 6.4 (2011), 3.7 (2012), 2.0 (2013), 1.0 (2014), 0.5 (2015), -0.5 (2016), -1.0 (2017). - Revenue and grants (percent of GDP): 40.4 (2006), 41.1 (2007), 37.1 (2008), 34.9 (2009), 36.1 (2010), 35.1 (2011), 35.7 (2012), 35.9 (2013), 36.0 (2014), 36.1 (2015), 36.3 (2016), 36.6 (2017). - Average nominal interest rate on public debt (percent): 4.1 (2006), 4.3 (2007), 4.5 (2008), 4.3 (2009), 3.6 (2010), 4.0 (2011), 4.7 (2012), 4.3 (2013), 4.5 (2014), 4.7 (2015), 5.0 (2016), 5.3 (2017). - Average real interest rate (percent): 0.0 (2006), 1.1 (2007), 2.1 (2008), 4.2 (2009), 3.2 (2010), 2.6 (2011), 4.1 (2012), 3.5 (2013), 3.4 (2014), 3.5 (2015), 3.7 (2016), 4.2 (2017). ### Alternative fiscal sustainability scenarios (public debt) - Interest rate shock: - Baseline assumption for real interest rates averages 3.3 percent over the projection period with spreads declining to 300 basis points in 2017. - If real interest rates reach 5.5 percent (extreme 2 standard deviation shock), debt would increase to 123 percent of GDP by 2017, about 17 percentage points above the current policies scenario. - Growth shock: - If growth falls by a little over 1 percentage point over the forecasting period, the debt-to-GDP ratio could reach 124 percent by 2017, about 18 percentage points higher than the current policies scenario. - Euro depreciation and contingent liabilities: - A 30 percent nominal depreciation of the euro (adjusted for domestic inflation) combined with an additional contingent liability shock of 10 percent of GDP would raise the debt-to-GDP trajectory to 117 percent. - Government liabilities denominated in foreign currencies are less than 2 percent. ### Bound tests for public debt (selected scenario outcomes, percent of GDP) - No policy change (constant primary balance) scenario in 2012–2017: 68.5, 90.3, 98.2, 104.7, 110.5, 116.6, 123.2 (table A1 row A2). - B1. Real interest rate at historical average plus two standard deviations: 68.5, 92.2, 101.1, 107.8, 113.3, 118.3, 123.5. - B2. Real GDP growth at historical average minus one standard deviation: 68.5, 91.9, 100.3, 106.8, 112.5, 118.0, 124.1. - B3. Primary balance at historical average minus one standard deviation: 68.5, 92.6, 101.3, 107.5, 112.5, 116.7, 121.0. - B5. One-time 30 percent real depreciation: 68.5, 90.7, 97.0, 100.7, 103.1, 104.8, 106.4. - B6. 10 percent of GDP increase in other debt-creating flows in 2012: 68.5, 100.3, 106.9, 110.9, 113.5, 115.4, 117.3. ### External sustainability: baseline and key external metrics - Large portion of 2012 external financing needs accounted for by non-resident deposits, with 2012 maturities estimated to about one third of GDP (including interbank deposits) and growing share of Eurosystem financing. - Baseline gross external debt (percent of GDP, selected years): 2007: 148.5; 2008: 153.7; 2009: 167.7; 2010: 164.3; 2011: 163.1; 2012: 175.3; 2013: 172.6; 2014: 167.2; 2015: 157.0; 2016: 149.6; 2017: 141.8 (Table A2). - Gross external financing need (billions of U.S. dollars): 2011: 293.9, 2012: 375.9, 2013: 341.7, 2014: 327.2, 2015: 307.8, 2016: 280.2, 2017: 270.9 (table A2 row, in billions of U.S. dollars). - Gross external financing need (percent of GDP): series reported in table A2 (label: in percent of GDP). ### Alternative external sustainability scenarios (impact on gross external debt, percent of GDP) - Interest rate shock: permanent ½ standard deviation shock (~40 basis points) to interest rate for all outstanding external debt would increase gross external debt by more than 5 percentage points of GDP by 2017 relative to baseline. - Growth shock: permanent ½ standard deviation shock to projected real growth (continuing recession in 2013, no growth in 2014, recovery to 0.4 percent by 2017) would increase gross external debt by close to 12 percentage points of GDP by 2017 relative to baseline. - Current account shock: permanent ½ standard deviation shock to projected non-interest current account balance would increase gross external debt by close to 8 percentage points of GDP by 2017 relative to baseline. - Standard combined shock: permanent ¼ standard deviation shock applied to interest rate, real growth rate and current account balance would increase gross external debt by about 11 percentage points of GDP by 2017 relative to baseline. - Under all alternative external scenarios, gross external debt ratio to GDP would nevertheless remain on a downward path at the projection horizon. ### Key vulnerabilities and contingent liabilities - Stock-flow adjustments are substantial; planned clearing of subnational arrears could increase debt by 3 ½ percent of GDP in 2012. - European financial assistance channeled as loans via the FROB would increase public and external debt. - Risk that debt maturity structure may decline further depending on market access; market scrutiny and higher interest costs increase downside risks. - Contingent liabilities have large potential effects on debt dynamics; combined real depreciation and 10 percent of GDP contingent liability shocks materially raise debt ratios. *Source: ANNEX I. FISCAL AND EXTERNAL SUSTAINABILITY, _cr12202 - ANNEX I. FISCAL AND EXTERNAL SUSTAINABILITY* ### ANNEX II. MAIN ELEMENTS OF THE LABOR MARKET ### ANNEX II. MAIN ELEMENTS OF THE LABOR MARKET ### Reform objectives - Objectives of the labor market reform enacted by decree law on February 10, 2012: - (1) to enhance market efficiency and reduce duality; - (2) to foster firms’ internal flexibility and avoid employment destruction; - (3) to promote permanent employment and employment creation in small firms; - (4) to make the workers more employable and fungible. ### 1. Measures to enhance labor market efficiency and reduce duality - Unfair dismissal compensation for permanent workers: - Reduced from 45 days per year worked, maximum 42 months, to 33 days per year worked, maximum 24 months. - Existing contracts keep cumulated compensation up to 42 months; new compensation days cumulate at 33 per year only until reaching the new maximum of 24 months. - New permanent contracts abide by the new rule. - Fair dismissal compensation for permanent workers: - Remains at 20 days per year worked, maximum 12 months. - Fair dismissals for unfavorable economic conditions are made easier; causes clarified to avoid excessive judicialization and make fair dismissals the regular channel to dismiss permanent workers. - Objective reasons justifying fair dismissals: - i) Economic: At least when the company faces current or prospective losses, or a persistent decline on its revenue or sales (for three consecutive quarters compared to the same period of previous year). - ii) Technical: Changes in the means or instruments of production. - iii) Organizational: Changes in the system of work or the organization of production. - iv) Productive: Changes in the demand for products or services that the company wants to sell in the market. - Small firms (less than 25 workers): - Compensation for fair dismissals of permanent workers is reduced, with 8 of the 20 days of compensation paid with public funds (the wage guarantee fund). - Duality is practically eliminated for small firms given the gradual increase of compensation for temporary workers to 12 days. - Significant difference remains between permanent and fixed term contracts if dismissal is judged unfair. - Public administrations: - Can use fair dismissals for objective economic, technical, or organizational reasons. - Economic reasons defined as a persistently insufficient budget (3 consecutive quarters); technical and organizational as in b. - Procedural reforms: - Removal of processing wages (wages paid during the legal process) for all fair dismissals. - Removal of the administrative authorization required for collective dismissals (which de facto was not granted without unions’ agreement). - Temporary contracts: - Renewal limited to a maximum of two years starting in 2013. - Cost of termination of a temporary contract remains as established in the 2010 reform: 9 days per year worked from January 2012, increasing by one year every year until reaching 12 days per year worked January 2015. ### 2. Measures to foster firms’ internal flexibility and avoid employment destruction - Firm-level agreements: - Given priority over regional or industry level collective agreements on wages, working time, professional classification, type of contracts, and measures to reconcile work and life balance. - Opt-out clauses: - Opt-out clauses from provincial or industry wide collective agreements for objective economic, technical, organizational or productive reasons are eased and clarified. - If no agreement on an opt-out clause, a commission including employers, employees and the government will decide. - Opt-clauses applicable to wages, working time, shifts, and working functions. - Objective reasons defined as: - i) Economic: When the company faces current or prospective losses, or a persistent decline on its revenue or sales (for two consecutive quarters). - ii) Technical: Changes in the means or instruments of production. - iii) Organizational: Changes in the system of work or the organization of production. - iv) Productive: Changes in the demand for products or services that the company wants to sell in the market. - Changes to working conditions: - Eased and clarified for objective economic, technical, organizational or productive reasons. - Working conditions defined as wages, working time, working system, and functional mobility. - Modifications can affect conditions recognized in the contract or in collective agreements. - If contract conditions exceed collective agreements, modification might be done unilaterally by the employer. - Collective agreements promoting internal flexibility: - Unless otherwise specified 10 percent of the time schedule could be irregularly distributed over the year. - Occupations defined more broadly to provide incentives for occupational mobility within the firm. - Temporary contract suspension / working time reduction: - Eased and clarified for objective economic, technical, organizational or productive reasons. - Working time can be reduced 10–70 percent and contracts can be suspended temporarily. - Affected workers are encouraged to take training to make them more employable. - Firms are entitled to 50 percent of the social security contributions for workers they suspend or reduce working time for a maximum of 240 days, and only if they keep the worker for at least a year after the suspension or working time reduction expires. - Ultra-activity: - Automatic extension of expired collective agreements (ultra-activity) is limited to a maximum of one year. Previously this extension was unlimited. ### 3. Measures to promote permanent employment and job creation in small firms - New permanent contract for small firms (less than 50 workers): - Trial period of one year. - Deduction from tax payments by € 3000 if the first contract is with a youth (16–30 years old). - Additional deduction of 50 percent of the worker’s unemployment benefit for up to 12 months if the worker was unemployed. - Hiring bonuses for small firms (less than 50 workers): - Youth unemployed (16–30 years old) with permanent contracts: €3300 for males and €3600 for females. The worker must be employed for at least three years. - Long-term unemployed (over 45 years old) with permanent contracts: €3900 for males and €4500 for females. The worker must be employed for at least three years. - Conversion bonuses: - To convert internship, replacement or substitution contracts into permanent contracts: deduction from social security payments of €500 for males and €700 per for females, during three years. - Permanent part-time contract reform: - Allows overtime and makes it more flexible. - Tele-work is promoted and regulated for the first time. ### 4. Measures to make the workers more employable and fungible - Individual right to professional training: - New individual right of 20 hours per year. - Increased supply of professional training by allowing direct participation of private agents. - New training account associated to each worker to improve training itinerary in case of unemployment. - New training contract for youth (16–25 years old): - Allows theoretical training within the firm, with a bonus to encourage use. - i. Minimum contract duration is 1 year and the maximum 3 years. No limit in the number of training contracts as long as they are in different professional areas. - ii. Firms of less than 250 workers signing this contract with an unemployed are exempt of social security contributions for the worker for the full duration of the contract. Firms of 250 workers or more are exempt of 75 percent. - iii. Firms transforming the training contract into a permanent contract can deduct from its social security payments €1500 per year during three years for males, and €1800 per year during three years for females. ### 5. Private placement and intermediation - Temporary Employment Agencies: - Authorized to act as private placement agencies. - Previously, only the public employment service and a few private agencies were involved in job intermediation. *Source: _cr12202 - ANNEX II. MAIN ELEMENTS OF THE LABOR MARKET* ### ANNEX V. EXTERNAL SECTOR ASSESSMENT ### ANNEX V. EXTERNAL SECTOR ASSESSMENT ### External position overview - Staff assesses Spain’s external position as substantially weaker than one consistent with fundamentals and desirable policy settings. - Key vulnerabilities: net external liabilities are too high and indicators point to real effective exchange rate overvaluation. ### Negative Net International Investment Position and capital outflows - Spain’s large negative net international investment position has remained around 90 percent of GDP since 2009. - High gross external debt has stabilized close to 170 percent of GDP since 2010. - Over 2010–11, portfolio liabilities have declined, while Eurosystem-related liabilities have surged. - Large portfolio outflows by non-residents took place in 2010–11 and early 2012, adding external financing needs to the current account deficit. - Despite residents’ portfolio repatriation, a private financial account deficit opened up in 2011 and early 2012, with large private “other investment” outflows over the recent period. - Net private outflows were compensated to a limited extent by ECB purchases of Spanish securities in the second half of 2011, and to a larger extent by increased ECB refinancing of Spanish banks (reflected in TARGET imbalances). - The negative IIP and large gross financing needs from external debt are major sources of external vulnerability, which have been materializing in relation with concerns about growth, banking sector restructuring, and the viability of the fiscal path, amid volatile market conditions. - A further large improvement in the cyclically adjusted current account would be needed to reduce net liabilities and address vulnerabilities stemming from a weak external position. ### Current account improvement - The current account deficit reached 10 percent of GDP in 2007 as a result of a domestic demand boom; it has been adjusting since then. - In 2011, the current account deficit dropped to 3.5 percent of GDP, with a cyclically adjusted deficit close to the actual deficit. - The current account balance continues to improve as the economy switches away from non-tradable sectors and the output gap widens. - Current account norm: The External Balance Assessment analysis points to a current account deficit norm of 2.5 percent of GDP for Spain in 2011. - Relative to the model estimate, the larger current account deficit is largely explained by the contribution of the fiscal policy gap. - Taking broader concerns into account, the 2011 cyclically adjusted current account appears to be 3 to 5 percentage points of GDP weaker than the value implied by fundamentals and desirable policy settings. ### Real exchange rate assessment - Competitiveness indicators based on either consumption prices or unit labor costs show that the large gaps opened since euro entry have only partly corrected since 2008. - Export market shares have been resilient. - Recent improvements in unit labor costs significantly reflect cyclical productivity gains from labor shedding. - Alternative competitiveness indicators exhibit a range of uncertainty, but suggest a real effective exchange rate 10–15 percent above the level consistent with underlying fundamentals and desirable policies. - REER values as of the Spring 2012 WEO reference period resulted in a gap of 11 percent under the EBA analysis, and 18 percent under the CGER analysis of the real effective exchange rate. - Spain’s REER depreciated by about 4 percent between the reference period and the time of the Article IV consultation. ### Policy implications - Because the current account improvement expected in the near-term partly reflects domestic demand compression and a sizeable output gap, attaining full employment and strong and sustainable growth would require a significantly weaker real effective exchange rate. - Policy actions highlighted: - An effective implementation of the labor market reform should bring down labor costs, contributing to reduce both external and domestic imbalances. - Financial sector restructuring should help banks regain market access and reduce reliance on the ECB, addressing vulnerabilities from the composition of the external position. - Delivering fiscal consolidation will also contribute to external adjustment. *Source: ANNEX V. EXTERNAL SECTOR ASSESSMENT, 2012 Article IV Report — Spain.* ### 2012. After an LTRO-induced respite, market tensions re-emerged in the spring. Yields ### _cr12202 - 2012. After an LTRO-induced respite, market tensions re-emerged in the spring. Yields and spreads on Spanish government bonds remain high and banks unable to tap private unsecured financing. ### Market tensions and macroeconomic outlook - Yields and spreads on Spanish government bonds remain high and banks unable to tap private unsecured financing. - Executive Directors noted the outlook remains very difficult and vulnerable to significant downside risks owing to: - ongoing private sector deleveraging, - heightened market tensions, - fiscal retrenchment, - high unemployment. - Directors emphasized the critical importance of sustained efforts and a clear, credible medium-term strategy for: - fiscal consolidation, - financial sector restructuring, - structural reforms. - Directors stressed that the success of this strategy depends critically on progress at the European level in strengthening the currency union. ### Banking sector actions, stress tests, and financial assistance - Recent policy actions on banks: - provisions and capital requirements have been raised, - independent valuations commissioned, - a backstop provided with support from Spain’s European partners. - Key policies accompanying the backstop: 1. identifying individual bank capital needs based on a comprehensive asset quality review and an independent bank-by-bank stress test; 2. recapitalizing, restructuring and/or resolving weak banks; 3. segregating legacy assets of weak banks into an asset management company; 4. burden sharing from hybrid/subordinated-debt holders in banks receiving public capital; 5. strengthening supervision and regulation. - Financial assistance: - estimated capital requirements with an additional safety margin summing up to €100 billion in total, - to be disbursed in several tranches over the 18-month duration of the program. - Note in table: Eurogroup’s commitment of up to €100 billion (9.4 percent of GDP) includes an additional safety margin; staff assumed this amount for projections pending further details on implementation. - Operational and timing details described by Spanish authorities: - evaluation of individual capital needs to be finalized in September; - all entities needing more capital must present recapitalization plans to be jointly approved by the Spanish authorities and the EC; - banks requiring public funds: approval and launching of recapitalization or resolution processes to be ready by year-end; - banks not needing public support have until June 30, 2013 to raise necessary capital from private sources; - all institutions requiring public funds will have to: - remove impaired assets by transferring them to an external Asset Management Company operational by November, - require burden sharing from hybrid capital and subordinated debt holders after allocating losses to shareholders. - From December 31, 2012 onwards, a minimum Common Equity Tier 1 ratio of 9 percent for all credit institutions will be requested. - Regulatory framework to be reviewed in loan-loss provisioning, credit concentration, governance (mainly of former saving banks and the commercial banks controlled by them), and transparency. - BdE internal procedures and operational independence to be strengthened by acquiring sanctioning and licensing powers currently held by the Ministry of Economy. - Directors’ views: - commended measures to restructure the financial sector and welcomed European financial assistance and the envisaged role of the Fund in monitoring progress; - stressed need to continue providing official support for weak but viable banks, resolve non-viable banks, and implement a comprehensive strategy to deal with legacy assets; - called for further efforts to upgrade supervision, crisis management, and the resolution framework; - considered that allowing direct recapitalization for Spanish banks through the European Stability Mechanism would help break adverse sovereign–bank feedback loops and have positive euro-area spillovers; - faster progress toward establishing a common supervisory mechanism for euro area banks would boost market confidence. ### Fiscal developments, slippage, and consolidation measures - 2011 fiscal slippage was about 3 percent of GDP. - Actions and developments: - new government introduced a first package of measures in December; - an ambitious 2012 budget was adopted in June; - fiscal framework was improved; - a scheme for clearing sub-national arrears was put in place. - Council of the European Union recommendation (July): another year (until 2014) for Spain to reduce its deficit below 3 percent of GDP and loosened the targets for 2012–14. - Recent government measures to help achieve new targets include: - increases in VAT, - reductions in civil service remuneration, - reductions in unemployment benefits. - Regional government actions: - initiated first step in the warning process for several regions at risk of missing targets, - monthly reporting from October, - a new funding mechanism. - Fiscal package welcomed by Directors: - supports a smoother path of consolidation in the context of weaker growth, though some Directors saw scope for a less front-loaded adjustment; - Directors urged strict adherence to the agreed fiscal path and the need for a credible medium-term budget strategy to reduce deficits and safeguard debt sustainability while protecting the most vulnerable. - Directors called on authorities to take additional measures as necessary, especially on the revenue side, and to use available tools to enhance fiscal discipline, particularly at the sub-national level. - Specific fiscal measures described by authorities: - December package aimed at yielding a 1.5 percent of GDP consolidation—8.9 billion euros in expenditure reductions, and 6.2 billion euros from increased revenues. - Council of EU recommendations and agreed deficit path: 6.3 percent of GDP in 2012, 4.5 in 2013, and 2.8 in 2014; structural yearly improvements of 2.7, 2.5, and 1.9 respectively. - recent additional consolidation measures: - increase in VAT—substantially raising rates and widening the basket of goods to which the highest rates are applicable—and the tobacco excise tax; - elimination of the mortgage income tax deduction; - reduction in the public sector wage bill; - further cut in ministerial spending of one billion euros; - 20 percent additional reduction in the financing of political parties, unions, and business organizations; - streamlining of active labor market policies; - steps aimed at guaranteeing sustainability of the social security and dependency long-term care systems. - Budget Stability Law enacted in February enshrines principle of budget balance and sustainability at all levels of government and contains new instruments to control budgets; its forceful implementation will be crucial. - Ministry of Finance initiated the warning procedure for regions at risk of breaching annual targets. - Council of Ministers approved, on July 13, a centralized fund to support financing of regions, subject to reinforced fiscal conditionality. - Public debt and projections (table data and staff assumptions): - General government debt: 2007 36.3, 2008 40.2, 2009 53.9, 2010 61.2, 2011 68.5, 2012 89.6 - Staff projects that public debt level will stabilize within the forecast period, even if the total amount of the European assistance for the financial sector is included (staff assumed the Eurogroup’s commitment of up to €100 billion for projections). ### Labor market reform and structural policies - Labor reform introduced in February with measures to: - reduce labor market duality by lowering dismissal costs of permanent workers for unfair dismissals; - reduce wage rigidity; - increase firms’ internal flexibility by giving priority to firm-level agreements over wider collective agreements. - Directors underlined urgency of additional progress in boosting competitiveness and jobs given high unemployment, especially among youth. - Directors welcomed recent labor market measures aimed at reducing market duality and wage rigidity and increasing firms’ internal flexibility, and recommended complementing these with further steps to improve product and service markets and the business environment. - Authorities' reported implementation signals: - collective agreements signed in 2012 have led to wage moderation; - opt-out clauses are increasingly being used; - severance payments for collective dismissals have decreased. - Other structural reforms in progress: - reforms focused on the energy sector, the service sector—particularly professional services—shopping hours, commercial distribution, and the transport sector. - Directors encouraged rapid implementation of the government’s structural reform agenda. ### Selected economic indicators (2007–2012) — key figures preserved exactly as in source - Real economy (change in percent) - Real GDP: 2007 3.5, 2008 0.9, 2009 -3.7, 2010 -0.1, 2011 0.7, 2012 -1.7 - Domestic demand: 2007 4.1, 2008 -0.5, 2009 -6.2, 2010 -1.0, 2011 -1.7, 2012 -4.1 - Harmonized index of consumer prices (HICP): 2007 2.8, 2008 4.1, 2009 -0.2, 2010 2.0, 2011 3.1, 2012 2.1 - Unemployment rate (in percent): 2007 8.3, 2008 11.3, 2009 18.0, 2010 20.1, 2011 21.7, 2012 24.9 - Public finance (in percent of GDP) - General government balance: 2007 1.9, 2008 -4.2, 2009 -11.2, 2010 -9.3, 2011 -8.9, 2012 -6.3 - General government structural balance: 2007 -1.1, 2008 -4.9, 2009 -9.3, 2010 -7.6, 2011 -7.6, 2012 -4.7 - Primary Balance: 2007 3.5, 2008 -2.6, 2009 -9.4, 2010 -7.4, 2011 -6.4, 2012 -3.1 - General government debt 2/: 2007 36.3, 2008 40.2, 2009 53.9, 2010 61.2, 2011 68.5, 2012 89.6 - Interest rates (in percent) - Short term deposit rate: 2007 3.8, 2008 1.0, 2009 0.8, 2010 1.7, 2011 2.2, 2012 2.2 - Government bond yield 3/: 2007 4.3, 2008 4.4, 2009 4.0, 2010 4.3, 2011 5.5, 2012 7.1 - Data refer to 10-year government bond yields. Data for 2012 are as of July 20, 2012. - Balance of payments (in percent of GDP, unless otherwise noted) - Trade balance (goods and services): 2007 -6.5, 2008 -5.5, 2009 -1.6, 2010 -1.9, 2011 -0.5, 2012 1.6 - Current account balance: 2007 -10.0, 2008 -9.6, 2009 -4.8, 2010 -4.5, 2011 -3.5, 2012 -1.8 - Fund position (May 31, 2012) - Holdings of currency (percent of quota): 68.2 - Holdings of SDRs (percent of allocation): 94.3 - Quota (millions of SDRs): 4,023.4 - Exchange rate - Exchange rate regime: Euro Area Member - Euro per U.S. dollar (June 18, 2012): 0.80 - Nominal effective rate (2005=100) 4/5/: 2007 101.6, 2008 104.1, 2009 104.7, 2010 102.6, 2011 102.6, 2012 100.5 - Real effective rate (2005=100, ULC-based) 4/: 2007 108.9, 2008 113.9, 2009 110.3, 2010 107.2, 2011 106.2, 2012 101.8 ### Executive Board and authorities' statements and priorities - Executive Directors: - commended authorities for decisive actions on many fronts; - welcomed European financial assistance and the Fund’s envisaged monitoring role; - urged continued official support to viable banks and resolution of non-viable banks; - emphasized upgrading supervision, crisis management, and resolution frameworks; - highlighted need for credible medium-term fiscal strategy and additional revenue-side measures as needed; - stressed urgency of boosting competitiveness and jobs and fast implementation of structural reforms. - Statement by Carlos Perez-Verdia, Executive Director for Spain and Carmen Balsa, Senior Advisor: - acknowledges comprehensive plan focusing on financial sector, fiscal accounts, and structural reforms; - notes two Royal Decree Laws enacted raising regulatory demands on banks’ provisions and capital buffers; - describes MoU on Financial Sector Policy Conditionality as backbone of financial sector reform until completion; - reiterates commitment to implement measures, stand ready to adopt additional measures as necessary, and work with European partners; - emphasizes implementation, forceful application of Budget Stability Law, and dependence of ultimate success on progress at the European level in strengthening the currency union and reducing sovereign debt market stress. *Italicized source: IMF Article IV staff report excerpt and associated statements from the provided content.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12202.pdf_