Transcript

June 19, 2013
Madrid, Spain

Panelists:
Ranjit Teja, Deputy Director, European Department
James Daniel, Mission Chief for Spain
Ángela Gaviria, Communications Department

MS. GAVIRIA: Welcome to this press conference on the conclusions of the IMF team that has been visiting Spain for about two weeks to carry out what we call the Article IV Consultation. This Consultation is an analysis of the state of a country’s economy that the IMF conducts with all its member countries and is done, in most cases, every year. The document that you have seen is the Concluding Statement of the team. They will subsequently write a detailed report that will be shared with the IMF’s Executive Board, and will subsequently be published. We expect the publication in late July.

Before starting, I'd like to thank the Bank of Spain for having helped us to organize this press conference. And now let me introduce the speakers. To my left is James Daniel, who is the Mission Chief for Spain. And to his left is Ranjit Teja, who is Deputy Director in the European Department of the IMF, and who also oversees the work that is done on Spain. Both will speak briefly, and then they will be happy to take your questions.

MR. TEJA: Thank you, Angela. Let me welcome all of you, and start off by saying that all of you have a copy of the IMF's final statement.

Our goal here is to give you a chance to ask questions about that statement. We will not be able to go into very detailed answers or into specific numbers; all of that will come out, along with our full analysis of the Spanish economy, next month, when our report goes to the IMF Board, and then is published.

But, certainly, what we can do here today is to give you a sense of the logic and the arguments behind some of the observations that we make in the Concluding Statement.

I would also like to point out that the perspective that you see in the final statement is based on discussions with many actors. Yes, of course, first, the government, but also a range of other actors in the economy -- unions, opposition groups, independent economists, and, also, this year, we made a special effort to go outside Madrid to also be in touch with the regions. We've had discussions in Barcelona, Valencia, and Seville. So, really, we have tried to bring as broad a view as we can, because we view our role here as one of independent professional advisers.

As you might guess -- and, certainly, it's clear from the Concluding Statement -- the central theme of our discussions has been growth and jobs. What must be done to make recovery stronger, but also much more jobs-rich than it currently is?

So, if you'll allow me, before we get into details, I’d like to make two broad observations.

The first one is that we see a huge improvement, in terms of the progress on policy reform since the last time we were here. The actions taken by the government have done a lot to boost confidence, to prevent much worse outcomes, and to tackle two of the most severe imbalances that Spain faced just a year ago: its external current account deficit and its fiscal problems. So there has been tremendous progress to date.

Secondly, in our view, a lot remains to be done, both to take forward the reforms that have been announced in a general way, and, also, in some areas, to take them further in new directions. And that is where I turn to James Daniel, to give you a better sense of detailed policies.

MR. DANIEL: Thank you. Let me highlight five specific policy messages.

First, labor reform should go further to generate jobs and reduce duality. Compared to other countries, Spain's economy has adjusted to the crisis too much by reducing jobs, rather than moderating wages. This is improving recently, but it needs to go further.

Too many people in Spain have either no job or a temporary job. A better balance can be struck between protecting those on permanent contracts and giving more opportunity for others -- the unemployed or those on temporary contracts -- to allow them to be hired on a permanent contract.

Second, the jobs crisis calls for a mechanism to bring forward the gains from structural reforms. That's why we suggest a mechanism -- some form of agreement between employers and labor -- to accelerate hiring, and accelerate wage adjustment. Of course, we recognize the difficulty. In our view, any such agreement would be to complement structural reforms, not substitute for them.

Third, banks should continue to reinforce their balance sheets so they can lend. Progress under the program has been strong. This is a significantly stronger banking system than it was a year ago. This progress needs to continue. Stronger banks means less risk to the taxpayer, more confidence for the depositor, and a system that is more capable of lending.

Credit is clearly a major issue. We heard this from almost all the actors that we met. Now, undoubtedly, much of the credit contraction is due to falling demand. But there could also be supply constraints. Identifying and removing them could greatly help support firms that are struggling right now. This is no easy task, and it probably speaks more to Europe than to Spain. But Spain should do as much as it can.

Fourth, fiscal consolidation needs to continue, but the challenge is to minimize the inevitable drag on growth. The large fiscal consolidation that Spain achieved last year was necessary. Spain had a very large deficit. It had little credibility, and it was facing difficult financing conditions. Had the deficit not been cut, the government's solvency could have been called into question, and this would lead to a much worse outcome for Spain, as we can see in some other euro area countries.

But the consolidation needs to continue at a gradual pace. The deficit is still very large, and it is not sustainable at these levels. But consolidation hurts growth, and so it needs to be done as gradually as possible, and in a growth-friendly way.

Fifth, Europe should do more to help Spain. Spain is facing an inevitably very difficult adjustment following the boom years. It is very much in Spain's interests, of course, but it is also in the euro area's interest that this adjustment be as smooth as possible. We have seen European policies improve in this direction, but, still, much more could be done.

In particular, the ECB's low-interest rate policy is not being reflected evenly across the euro area. For example, in the borrowing costs of Spain's small and medium enterprises. And borrowing costs for Spanish firms and banks are still too influenced by where they happen to be located, rather than on their own inherent business strength.

This means the ECB should be doing more to ensure that its policies are better transmitted -- and, above all, leading to a full banking union.

QUESTIONER: My question is just to know if you're in agreement with the messages that are currently coming from the government, to encourage the banks to offer loans. Do you think it's prudent for the banks to carry out a special effort, taking into account that offering loans without sufficient guarantees that they're actually going to be paid back, could be a risk for the banks?

MR. DANIEL: As I said earlier, credit is probably a major issue here. It is a major issue. Lending should be done to healthy firms. If they're not healthy firms, they should not be lending to them. Banks need to make that decision. There could, though, be supply constraints. For example, the high cost of lending. Insofar as there are supply constraints, we think pro-activity by the government, by the Bank of Spain, to look to remove those supply constraints, would be in order.

QUESTIONER: In the report you talk about the fact that the measures to guarantee fiscal consolidation should be permanent. How do you see the reduction of the income tax that the government has announced, which will be put into place next year? The second question is related to credit. You suggest that, to unblock credit, there should be certain measures to enable sharing to give these loans or credits to the SMEs. So, should they share the risk through this institution?

MR. DANIEL: On the first question, let me add a bit of context here. Spain still has a very high deficit. It needs to be reduced. The government's plan is mainly to focus on expenditure. We would see scope for a bit more reliance on revenue. Spain's revenue ratio is still comparatively low in Spain. How to increase revenue? There are many options, but what matters is the final outcome.

In general, we would see scope for increasing revenues from indirect taxation -- in particular, broadening the base of indirect taxes, rather than raising rates.

On your second question, this is a very complicated issue, and you need to strike a balance. Banks should still bear the risk of that lending, but it could be that there is some excessive risk aversion at the moment towards certain kinds of firms. There could be information asymmetries. It could also be that, for each individual bank, it might make sense to reduce their lending. But for the system as a whole, for Spain as a whole, there could be benefits for a less-fast reduction of credit.

To address these potential externalities, as we call them, we look at all the options of how to support credit, while not interfering with the decisions of banks should be explored. And one option could be some kind of risk-sharing mechanism.

QUESTIONER: You've said they've got to progress in the labor reform and, also, the salaries. But this is a policy that the government's been following, and the results to-date show that we've got more unemployment than ever, and, also, the salaries are very low. So, do you think we should continue along the lines of the current reform?

MR. DANIEL: The simple answer is, the reform is going in the right direction. And yes, it should continue.

There is a major problem with unemployment in Spain, and when we look at how other countries have responded to the crisis, we see other countries striking a different balance between reductions in jobs and moderation in salaries. Spain has relied very much on reducing jobs, and salaries and wages are still more or less the same as they were in 2007. In fact, in nominal terms, they've gone up more or less in line with the rest of the euro area.

We think a better balance could be struck between wage moderation and job losses, so we can have more of the adjustment on wages and salaries, and less adjustment on jobs. There's a tradeoff here.

QUESTIONER: You mentioned in the report that banks should improve the quality and the quantity of their capital. You also welcomed the steps from the Bank of Spain to clarify the refinancing, and the ways to account for refinanced loans. I would like to know what should be the next step after that. You also mentioned that a rigorous and regular stress test should take place. So, would you welcome, following the first exercise of looking at the portfolio of loans, a stress test? And do you think, the government should move ahead, and actually impose a new round of provisioning, or ask banks to set aside more capital?

MR. DANIEL: We think there should be prompt recognition of losses. Now, the Bank of Spain has been moving very actively in this direction. The recent clarification of classification for restructured and refinanced loans is very welcome. The next step is to make sure that banks are fully using these new guidelines, and they should go ahead and ensure that's the case.

You asked about the stress test, I think. Spain had a very thorough stress test last year. It will have another one in the future, as it moves into the Single Supervisory Mechanism. In the meantime, we think it would be useful, as all supervisors do in terms of best practice, to look again. The Bank of Spain should look and say, "Well, let's look at the system today, and see how it is compared to a year ago. Let's see how robust it is to different macroeconomic scenarios" -- because, as we point out in our Concluding Statement, the outlook is quite uncertain.

So, they should run these internal exercises to see the resilience of the system to different scenarios, and that should inform the supervisory decisions. Those decisions may result in requesting more capital.

What we would also say is that capital has been improving in Spain, and this should continue. The risks from the macro-economy are still quite large.

In this uncertain context, we would expect caution in the distribution of capital and, in particular, on the distribution of cash dividends.

QUESTIONER: Good morning. Two questions. The first one is how much do you think salaries should go down to correct this imbalance?

And then, as you said, you’ve had a contact with the Valencia community. What impression have you got from this region? Because, apparently, it seems it's the worst region in relation to the economic situation at present.

MR. DANIEL: Let me ask the question in a different way. What needs to happen to generate jobs in Spain quickly? This is a crisis, as we say. The idea that salaries are not related to jobs is wrong. There's a tradeoff here. Spain needs to generate jobs, and that probably means more flexibility on wages, going forward.

In terms of the Valencia consultations, we had very open and frank discussions. Many of the issues that we've raised in our Concluding Statement, we also raised there. There were lots of discussions, also, about the regional financing system, about fiscal consolidation, and we had very, very useful conversations with them. Our impression is that they're concerned about the same things as many other people -- fiscal consolidation, jobs, growth, and credit.

QUESTIONER: Regarding the negative feedback between loops between banks and the sovereign, I wanted to ask you if you consider the low default rate on mortgages, given the level of unemployment in Spain now, is a sign of the resilience of the system, or would you think that the full effects of joblessness are yet to feed through to the banks' mortgage books?

MR. DANIEL: I think the simple answer to that one is, yes, it is a reflection of the resilience of the system. It's certainly true that Spanish households are particularly careful about paying their mortgages and would rather sacrifice other things than sacrifice their homes. And that's a very important pillar of strength, I think, for the Spanish banking system.

Is it yet to feed through? Well, NPLs are typically a lagging indicator, so we would not be surprised if it were to continue to increase somewhat in the medium term, but we're getting into speculation here.

QUESTIONER: Good morning. Mr. Klaus Regling a few days ago said that there was a possibility that the IMF would leave the Troika in the medium term. What opinion do you have on that?

MS. GAVIRIA: I would like to remind you that this press conference is about Spain’s Article IV Consultation. Comments with regard to your question -- and there are recent comments on that from Washington – are published on the Internet page and I can explain later exactly where those are. Our opinion hasn't changed; you can get that information on the webpage. So, please, can we keep all questions on Spain, this consultation, and the conclusions that we're presenting here?

MR. DANIEL: Maybe I can just pick up on one thing you mentioned. I think you used the word "Troika."

QUESTIONER: Yes.

MR. DANIEL: Can I just clarify that I don't think this word represents what is happening in Spain? As you know, there is a program by the ESM to support Spanish banks. That is a European program. We, the staff of the IMF, have been asked by the Europeans, and we've been asked by the Spanish authorities, to give independent monitoring and advice. So we do not see ourselves as any kind of a new Troika here. We're advising both sides equally, in an independent role. And let me add that our relations are excellent.

QUESTIONER: You painted a pretty grim picture of unemployment and credit. If unemployment doesn't go down, and credit doesn't free up, what risks you do see going forward, in the short and medium term? I mean, could we see social unrest, à la Greece?

MR. DANIEL: Well, I'm not going to get into these kinds of social speculations. But I think you're heading into the right topic. What happens if this recovery in Spain is not strong enough? What happens if this recovery does not generate enough growth and enough jobs? That's exactly what we're talking about here, and how can we reinforce this recovery, to make it as job-rich as possible. And this gets back to the issue that some of your colleagues have been raising about salaries. We need flexibility. We need to make sure that this recovery generates jobs, good, quality jobs.

That's why we also talk about duality. We need good, quality jobs, and lots of them, as soon as possible in this country. And that's where we're trying to move, and to focus on consultation.

QUESTIONER: I've got two questions. The first one is on salaries, that you're asking that salaries should be moderated. In the report you said net external demand wouldn't compensate the domestic demand for salaries keep going down. What can we do to make domestic demand go up? That's the first question. And the second one is on credit. You have also mentioned that credit is continuing to go down. There's recently been an advertising campaign from the (inaudible) saying that credits were starting to flow. But you seem to have a different opinion. You said there's going to be less credit available in Spain. So, could you talk about that, please?

MR. DANIEL: I think the first question was about domestic demand. Domestic demand will remain constrained in Spain for the indefinite future -- full stop. The question is to make what demand there is as growth-friendly and as job-friendly as possible. That's why we're talking about continuing to reform the labor market, to make it more job-friendly.

What could help domestic demand in Spain? Probably investment is an important area that could cover strong. And this comes to your second question about credit. That's why we would like to be proactively looking to remove any constraints that there might be on lending to healthy firms.

In terms of the numbers -- the numbers speak for themselves. Credit is falling at a very fast rate in Spain, and it may improve, but it's still going to be a negative number for quite a while, probably.

The important thing is, within the credit that is available, to make sure it goes to the healthy firms, and not to the unhealthy firms. The resources can be redirected to firms that are growing and can hire.

And that's why, if I may just come back to our Concluding Statement, that fits into what our calls are, to look at the insolvency regime -- so that healthy firms can continue to grow, but unhealthy firms can have their resources reallocated to these healthy firms. And that means a fast liquidation process for those unhealthy firms, but a quicker process to help healthy firms with healthy, ongoing business.

MR. TEJA: Let me just add to a point that James made. In our view, nothing helps raise demand like a man or a woman with a job and an income. So, that's why the focus on wage adjustment, on labor market reform, is precisely to produce aggregate demand that will create people with incomes. Right now, you're losing aggregate demand because people don't have a job.

QUESTIONER: The Spanish government, for a long time, has been giving out the message that we're over the worst of the crisis, and now there's going to be signs of recovery. I would like to ask if you coincide with the government's view, taking into account the last economic outlook that has been published for Spain, which was negative. And, on the other hand, going back to the issue of banks -- do you believe that there's no further reason for uncertainty at the international level on Spain’s financial institutions? Or are there still doubts related to financial institutions here in Spain?

MR. DANIEL: Related to whether or not we see the economy stabilizing, the answer is yes. I think we do see signs of stabilization. Q2 will be better than Q1, and Q3 will probably be better than Q2. And we'll probably see positive growth in the second half of the year.

That's not really where we see the issue. The issue is looking forward, beyond that. Is this recovery going to be strong enough to generate jobs? That's where the uncertainty is. The uncertainty is not around, is the economy stabilizing? There, I think the government's quite right; there are clear signs of stabilization.

What we want is clear signs of strong growth and clear signs of employment recovery. And that's where the question mark is.

Are there still doubts about the Spanish banking system? I don't speak for others. I'll just come back to what I said before; we had a very thorough stress test last year. Things have happened since then, some positive, some negative. It is in everybody's best interest, and especially the supervisor -- Bank of Spain -- to keep checking how the system is, and that's why we recommend these exercises that it should do itself.

And one thing I might like to clarify: I know you haven't asked, but I think it'd be useful to clarify it -- why do we use these terms? I can quote from our Concluding Statement: "rigorous and regular forward-looking scenario exercises and bank resilience." I think one of your colleagues mentioned stress tests. We were careful not to use the word "stress test" because we don't think Oliver Wyman 2 today is necessary. But we do think vigilance and continued questioning of the system is, and that's a job for the supervisor to do itself.

QUESTIONER: I have two questions. One, if you think it's a risk that the end of the floor of mortgage interest rates is going to affect all the banks. And this is related to the mortgages. And, obviously, this could affect the banks, and they would need more capital. Also, do you think it's positive for the government to ask for, should we say, a delay or extension to the ESM program?

MR. DANIEL: Thank you for those questions.

On the first, on the recent decision about floors on mortgage interest rates -- obviously, it will have some negative impact for some banks. We don't know enough to speculate about how large that may or may not be.

On the second point, I think you're asking about whether or not the program should be expanded. Here are just a couple of reflections: The first is that the program's going very, very well. And the second is, there's time. Let's not rush into this decision. It still goes through the end of the year. It's going well. There's no need to rush.

QUESTIONER: I would like to ask two questions. The first one is just something I'm curious about. This initiative -- it's the first time you present this to press in Spain. We are very grateful for you coming here to provide your analysis of the situation. It was delayed for 48 hours after the initial call for the press conference. Is there any reason for this? Is it just due to the fact that you've got a busy agenda, or is it because you've been having conversations with the government?

And then there's another question that I'd like to ask you. When you talk about the fact that the economy will be recovering gradually -- I think one percent on the medium term -- could you explain or define what you think this one percent on the medium term is? What is the medium term for you?

MS. GAVIRIA: The press conference was delayed for logistical reasons. We had changes to scheduled meetings, but we still wanted to give you enough time to get the document and have it in front of you during the press conference. We needed time to translate it, so that you could be able to read it on time. So that was reason why this briefing was delayed. We just thought it was better that you had all the documents.

MR. DANIEL: On your second question, I think you're probing here for more numbers and more detail about our medium term view -- and I understand entirely that. Could I just ask, though, please, for you to hold back on that? At this moment, we're not ready to give all our detailed numbers. You will see it soon, though. You will see a full set of tables in the staff report that will be discussed by our Board at the end of July. There will also be a WEO Update -- a World Economic Outlook Update -- I think, in the middle of July.

MS. GAVIRIA: Yes.

MR. DANIEL: But maybe if I could just use your question as an opportunity to expand a bit more -- you mentioned what we say here about picking up gradually to around one percent in the medium term. This is the issue: Is that enough? If we look historically in Spain's experience, Spain has, historically, never generated jobs when growth was much lower than 1.5 percent. And we're saying that growth will pick up gradually towards one percent. You can see where I'm coming from here. We need to make sure this growth is either stronger or more jobs-friendly. That's the challenge, and that's the point we're trying to make in the Concluding Statement.

QUESTIONER: Good morning. In the fiscal tax consolidation process, there's two ways to face it. One was cutting back on expenditures, and the other one was taxes. The European Union, in their latest recommendations, said that the government should put more effort to contain expenses, rather than going to tax. And I think it seems that the government is doing more on containing expenses, rather than on the tax issue. So, do you think that is correct, or should we change the balance for something else?

MR. DANIEL: We certainly support all attempts to identify inefficient or unproductive spending. That's certainly something we support, and that's probably something that takes time to identify, and could help feed into adjustment in the future.

But, to give you a more direct response, we do see more of a role for revenue to help in the consolidation path for Spain; that's correct. On the reasons, let me mention a couple of things on the background of this. The first is that Spain's revenue ratios -- i.e. its tax take -- is actually quite low, compared to other European countries. The second is that the tax take is not being done very efficiently. The balance between the rate of tax and the amount of tax is not very good. In other words, the base could be broadened so the rates could be lower.

One other reason, just to expand a bit more: it's not that we like taxes, per se, but it's a difficult choice between expenditure and revenue. From our research, it also seems that, in the current juncture, where the economy is weak, households don't have access to savings, that the growth impact from higher indirect taxes may be less than the growth impact from lower expenditure. So that's why we think there could be more of a role for some good quality revenue measures that relate to broadening the base of indirect taxes.

QUESTIONER: Does the Spanish spread -- it is around 300 basis points at this moment -- reflect the reality of the Spanish economy? And I would like to know, also, what you expect in the public administration reform that the government is going to announce.

MR. DANIEL: Let me not speculate on what is the right spread for Spain. That's too complex. I think it's much better than it was last year; that's certainly true. And what concerns us is that, even though spreads have come from whatever they were -- 600 or so at this time last year, to 300 today, and that's been very beneficial for the government -- what we'd like to see is this benefit flowing more evenly across the entire economy.

Borrowing costs for the sovereign have come down significantly, which reflects, I think, both policies by Europe, but, also, policies by Spain. Borrowing costs for Spanish enterprises, Spanish firms -- the people who create jobs in this economy, especially small and medium enterprise -- have not fallen. That's where we see the main challenge.

You had another question. What do I expect from a public administration reform? I don't know enough details about this. We do know that the plan is to look and see if you can spend money more efficiently in Spain, and that seems eminently sensible. So, we look forward to seeing the results of that.

QUESTIONER: First of all, a clarification -- did you say the VAT should go up or not? The second question is do you think that the dates scheduled to reduce the deficit for Spain are correct or they should be extended or advanced. And the third question is do you think the government has relaxed the pace of the reforms that were started last year, when we said that there may be a rescue on the horizon?

MR. DANIEL: On the first question, I think you're asking, should the VAT rate be increased? We do not think that the standard rate of VAT should be increased; that's not what we're saying here. What I said a few times and I'd like to reinforce is that we think revenues of indirect taxes should grow in the medium term. We do not think rates necessarily need to go up. We need to broaden the base, so that you can get more money with the same rates. Yes, VAT revenue over the medium term should grow. That's not the same as saying the VAT rate should go up. In fact, if you were to broaden the base, you could even consider reducing the higher rate.

On the second question, I think you relate to the new excessive deficit procedure. Spain was originally obliged to hit three percent in 2014. The proposal is now, I think, for 2016 and I hope it will be endorsed shortly. This is a very sensible decision.

As we tried to explain in the Concluding Statement, Spain has to strike a balance here -- and Europe has to strike a balance. On the one hand, you have very large and unsustainable deficits; on the other hand, no growth. So, what's the answer? The answer is to do it gradually, and to do it in a growth-friendly manner that's relying on things like broadening the bases of taxes.

We would also say that we look at fiscal consolidation not as hitting magic numbers, you know. Three percent is an important guidepost, but if the world changes between now and 2016, if growth is much weaker, then Europe and Spain will need to be flexible. But the path, as is being proposed, seems broadly sensible to us.

Your last question was, are we seeing any relaxation of the pace of reforms? I wouldn't say that. We've seen a remarkably strong pace of reforms since we were here last year. I've worked on many countries in my career, and I would say, over the last 12 months, I've seen a remarkable amount of reform progress.

Our concern is that this should continue. It will be a mistake if the stabilization that we're seeing were to feed through to a reduction in this reform effort. But I think that's just a concern; it's not a reality. And we look forward to delivering on its ambitious agenda.

QUESTIONER: You visited different regions, among them Catalonia. Do you think the political situation there -- you know, the independence aspect -- could affect the region's economy?

MR. DANIEL: Luckily, I don't have to get into politics -- and I really don't want to. We had a day in Catalonia, and we met a wide range of people, including the government, and we had really, really excellent discussions. And, again, many of the issues that we see in all the other regions were raised by Catalonia too -- on deficit reduction, on growth and jobs. Political stuff is really not where we have much to say.

MS. GAVIRIA: Thank you very much for coming today. We end this press conference here.