Spain's Financial Crisis

Spain’s Financial Crisis &
Economic and Funding Strategy 2010
Group 11
Agenda
 Spanish Economy before the crisis
 The Great Spanish Real Estate Bubble
 Economic Strategy
 Structural Reforms
 Fiscal Consolidation Strategy
 Funding Strategy
Spanish Economy before the crisis
 Spain economic growth continued during the term

of
Prime Minister José Luis Rodríguez Zapatero (2004)
 The new government continued with liberalization,
privatization, and deregulation of the economy
 The GDP growth was robust at around 3% (European
standards.)
 However signs of a problem had started surfacing.
Unemployment levels, although down from the
highs of 1990s, were still at around 10%.
 The inflation rates were going high and there was an
increasing family indebtness at as much as 115% on
account of rising real estate and oil prices. The
yawning Trade and Fiscal deficit was another matter
of concern.
The Great Spanish Real Estate Bubble
 Spain witnessed a real estate boom starting late 90s.

The property prices increased by over 80% between 1990 & 2007.
Much of the boom was fuelled by low interest rates and easy
availability of credit. The average Spaniard’s desire of owing a house
was the underlying driver of this phenomenon with active
government encouragement.
 The Real Estate sector soon came to become one of
the most important sectors in the Spanish economy,
generating employment and causing influx of migrant
laborers.
 Post the worldwide economic meltdown of 2007, the
Real Estate boom collapsed.
In the period 2007-2008 Spain became the worst effected country in
terms of the sharp plunge in construction sales. Actual sales went
down by 25%, causing the new constructions to come to a standstill.
This further aggravated the Unemployment problem which rose
dramatically to 21% while the rest of Europe was at 9.6%.
And the burst !
 Post the worldwide economic meltdown of 2007,

the Real Estate boom collapsed.
In the period 2007-2008 Spain became the worst effected
country in terms of the sharp plunge in construction sales.
Actual sales went down by 25%, causing the new constructions
to come to a standstill. This further aggravated
 High rates of Unemployment GDP - real growth
The Unemployment problem which rose dramatically to rate
21% while the rest of Europe was at 9.6%. 2% (2008)
7% (2007)
 Creating new jobs incredibly difficult 9% (2006)
 Confronted with wage demands which are unfit for
the less modern economy.
 Forced to cut jobs in order to compete, because it
cannot devalue its currency. It is running out of space to
create greater productivity
Spain today..
Over 20% of the workforce is unemployed

Deficit equal to 11.4 percent of GDP
Total debt equals 270 percent of GDP
Rampant credit downgrades
Unsold housing inventory levels SIX TIMES
WORSE than America With the amount
A "green economy" that strangles two jobs for of funding Spain
requires, there's no
every one it creates way the current
Caught between austere misery and a credit eurozone bailout
downgrade could meet Spain's
needs if things got
IMF forecasts NO POSITIVE GROWTH until 2011 worse.
The strikes and protests are just getting started
Catch 22
Caught between austere misery and a credit

downgrade
A Loose Loose situation
 What ever you do will harm the economy
 Onourous debt levels difficult to be serviced
Cut the government expenditure and you devastate the
Economy
 Keep the same level of expenditure, you end up going the
Greece way
Banks at a glance..
What does it mean to Europe?
EUR Millions Exposure to Spain Exposure/ Tier 1
Capital
Spain 203,310 113%
Germany 31,854 21%
France 6,592 4%
United Kingdom 5,916 2%
Belgium 3,530 11%
Netherlands 1,685 2% Barclays, Deutsche
Bank, and BNP has
Italy 1,383 2%
large estimated
Ireland 391 2% exposures to
Portugal 345 2% Spanish sovereign
Austria 239 1% debt.
Is Spain a dead Economy walking?
Is Spain the Iceberg all set to sink the Titanic

that is Europe ?
Government’s Macroeconomic Plan
 The output gap to be closed by 2013, after

peaking in 2010
 External demand contribution to GDP will
gradually wane as domestic demand would
begin to gather steam
 Potential growth must recover from a trough
of 0.6% in 2010 to 1.6% in 2013
Economic policy strategy for sustainable growth
 Prudent Macroeconomic Scenario 2010-

2013
 Agreement on Fiscal Consolidation to bring
the deficit back to 3% in 2013
 Structural Reforms:
• Structural Reforms in the goods markets
• Public Pensions System
• Residential Real Estate Sector
• Labour Market
• Banking sector Restructuring
Fiscal Consolidation Strategy
 Substantial reduction in Spending and moderate increase in
Revenues
 Already in 2010 a 2.2% cut in structural deficit
 Temporary measures (changes in tax collection, one off
investment funds) account for 2.4% points of GDP in 2009’s
total deficit
 Total size of fiscal policy adjustment (structural terms):
5.7% of GDP
 Restraint in wage outlays for all public administrations
through:
• 10% replacement rate
• No new temporary hiring
• Strong moderation in wages
 Sizeable cuts in investment, transfers and subsidies
 Shared commitment to fiscal discipline and margin to
secure further reductions in the deficit
Highlights of Funding Strategy
 Significant reduction in net funding requirements

and persistence of sound risk metrics
 Liquidity, transparency and predictability will
continue as guiding principles for the execution of
our auction program
 As for syndications, timing is dictated by the limit
size of the line to be replaced (16.5 bn for longer
tenors) and market conditions
 Innovations for 2010: 18-month T-bills reappear,
Euro inflation linker still a project
 Maintain a stable and diversified investor base
Thank You
Group 11
Sandeep Deb
Purnendu Singh
Tulika Dhawan
Rahul Malik
Vijit

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Spain’s Financial Crisis &

Economic and Funding Strategy 2010

 Spain economic growth continued during the term

 Spain witnessed a real estate boom starting late 90s.

 Post the worldwide economic meltdown of 2007,

Over 20% of the workforce is unemployed

Caught between austere misery and a credit

Is Spain the Iceberg all set to sink the Titanic

 The output gap to be closed by 2013, after

 Prudent Macroeconomic Scenario 2010-

 Significant reduction in net funding requirements

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