European Policy Makers look for Long Term Debt Crisis Solution
22nd January 2012

European officials will push on tomorrow with a long-term plan to tackle the region’s debt crisis, as banking and government negotiators zero in on an agreement that will lighten Greece’s debt burden. European Union finance ministers will meet in Brussels to discuss new budget rules, a financial firewall to protect indebted states and a Greek debt swap, with EU leaders racing to cobble together a firm rescue response in the coming weeks. Meanwhile, cash-strapped Greece and private bondholders said they had made progress in talks over the weekend in Athens.

As investors ignored this month’s euro-area downgrades by Standard & Poor’s and sent the single currency to its first gain in seven weeks, leaders including German Chancellor Angela Merkel are set on exploiting the moment to lock in a final response to the two-year-old crisis. Last week Spain, Greece and the euro bailout fund, the European Financial Stability Facility, sold bonds at lower rates, signaling greater demand for the assets.

ECB Assistance

The European Central Bank provided assistance last month by issuing 489 billion euros ($632 billion) in unlimited three-year loans to euro-region banks, an injection that diminishes the chances the debt crisis could turn into a financial crisis. In Athens, private creditors and Greek officials cited progress in talks aimed at lowering the country’s debt and drawing a second round of international financing before it faces a 14.5 billion-euro bond payment on March 20. A 4-1/2 hour meeting with officials representing the creditors and Prime Minister Lucas Papademos broke up about 1 a.m. yesterday.

European officials and the nation’s private bondholders agreed in October to implement a 50 percent cut in the face value of more than 200 billion euros of Greek debt by voluntarily exchanging outstanding bonds for new securities, with a goal of reducing Greece’s borrowings to 120 percent of gross domestic product by 2020.

Permanent Rescue Fund

The proposed treaty will require a centralized “correction mechanism” to be triggered automatically in cases of “significant” deviations from a target structural deficit of 0.5 percent of GDP, according to a draft dated Jan. 19 obtained by Bloomberg News. Reflecting German demands, countries would have to enact “binding and permanent” balanced-budget rules. Ministers tomorrow will also discuss a separate draft accord on Europe’s planned permanent rescue fund that eases earlier provisions on debt restructuring. The proposed agreement still calls for clauses in bond contracts that would prevent small groups of investors from blocking a decision, while deeming write-offs “exceptional” and subject to International Monetary Fund standards, according to a draft.

German Foreign Minister Guido Westerwelle said the EU remains committed to the euro common currency and underscored the importance of sufficient financing to indebted states.

Spanish banks ordered to find another €50bn

6th January 2012

Spanish banks will be required to find another €50bn in provisions to make up for ‘bad property assets' as the government carries out further reforms on the financial sector. The recently-appointed economy minister, Luis de Guindos, has told the banks they must clean up their balance sheets without burdening the government, according to the FT.

The Spanish govenrment was expected to follow Ireland and set up a state-funded ‘bad bank' to take on non-performing assets and loans following the financial and property crisis. However, stronger banks such as Santander and BBVA opposed these plans, forcing the governement to order a further €50bn to be set aside. This is much higher than analyst expectations and equivalent to 4% of Spain's GDP.

The Bank of Spain has reported that of the €338bn of property-related assets in the Spanish financial system, €176bn of these are ‘bad assets'.

Outlook for Euro Darkens on Summit, ECB Policy

12th December 2011

Foreign-exchange strategists are reducing their forecasts for the euro at the fastest pace this year as European Central Bank President Mario Draghi’s interest- rate cuts remove one of the currency’s pillars of support. Since Nov. 3, when Draghi began to undo the rate increases implemented earlier this year by his predecessor, Jean-Claude Trichet, analysts have cut end-of-2012 estimates for the euro to $1.32 from $1.40, based on the median of 40 forecasts in a Bloomberg survey as of last week. It has weakened versus every major currency except the Swiss franc since then, after gaining against 12 of the 16 this year prior to that.

Investors are fleeing assets denominated in the 17-nation currency as European Union leaders fail to end concern that Italy and Spain will succumb to a sovereign-debt crisis that forced Greece, Ireland and Portugal to seek bailouts. While euro bulls say sentiment is so negative that the currency has nowhere to go but up, bears point to surveys showing the euro zone’s economy will expand 0.5 percent next year, compared with 2.19 percent for the U.S.

“There still has to be further monetary easing by the ECB to support growth in the euro area for 2012 and beyond,” Ken Dickson, investment director of currencies at Standard Life Investments in Edinburgh, which manages about $235 billion, said in a Dec. 9 telephone interview. “There’ll be further weakness, particularly in the first half of next year,” which may push the currency to as low as $1.20 from $1.3386 last week, he said.

For much of this year, relatively high interest rates gave international investors an incentive to hold European fixed- income assets even as the threat of more bailouts rose. Trichet’s increases in April and July pushed the ECB’s main refinancing rate to 1.5 percent from 1 percent, helping drive yields on two-year German bunds to 1.31 percentage points more than U.S. Treasuries of similar maturity on May 4 from 0.2 percentage point in January. The euro appreciated as much as 16 percent in that period. Since then, the gap has shrunk to 0.09 percentage point, and the euro has depreciated about 10 percent.

The two-year Treasury-German note spread has “been the most statistically significant” driver of the euro-dollar exchange rate “over time,” strategists at New York-based Citigroup Inc. said in a Dec. 9 report to clients. Europe’s common currency fell 0.9 percent to $1.3272 at 10:25 a.m. London time. It dropped 0.6 percent to 103.25 yen and weakened 0.2 percent against the pound to 85.25 pence.

European leaders unveiled a blueprint last week for a closer fiscal accord to save the currency, adding 200 billion euros ($268 billion) to their bailout fund and tightening rules to curb future debts. They also will start a 500 billion-euro rescue fund next year and diluted a demand that bondholders shoulder losses in rescues.

The measures failed to spur the ECB, which has bought 207 billion euros of sovereign bonds since May 2010 to curb a rise in borrowing costs, to commit to purchasing more securities. Yields on Italian five-year securities jumped as much as 65 basis points, or 0.65 percentage point on the day of the Dec. 8 ECB meeting, rising above 7 percent the next day.

“There’s an element of disappointment in that much more could have been done,” Samarjit Shankar, a managing director for the foreign-exchange group at Bank of New York Mellon Corp. in Boston, said in a Dec. 9 telephone interview. “The tolerance of investors has been severely tested and there’s a general expectation that a lot more needs to be done.”

Spanish Banks Ratings Downgrade

13th October 2011

S&P and Fitch have downgraded some of Spain's largest financial institutions including bank Santander, citing a deteriorating outlook for the Spanish economy. Standard & Poor's (S&P) said it was downgrading the ratings of 10 financial institutions, including the country's two biggest banks, Santander and BBVA.

It downgraded Banco Santander and Banco Bilbao Vizcaya Argentaria by one notch, to AA- from AA. Meanwhile, Fitch said it was cutting the ratings of six banks, after downgrading Spain last week, the BBC reports. This included downgrading Santander one notch to AA-, and BBVA by one notch to A+.

S&P said its latest action resulted from the "tougher-than-previously-anticipated macroeconomic and financial environment in Spain".

"In our view, Spain's economy faces dimming growth prospects in the near term, real estate market activity remains depressed, and turbulence in the capital markets has heightened."

It said banks would continue to be affected by imbalances in the Spanish economy for the next 15-18 months. Last Friday, Fitch said Spain's high underlying budget deficit and its fragile economic recovery made the country "especially vulnerable" to external shocks.

Spain rated higher risk than Bulgaria

21st September 2011

Spanish debt is more expensive to insure than Baa2-rated Bulgaria, signaling the euro region's fourth-biggest economy may not warrant its Aa2 credit status. Moody's Investors Service rates Spain two levels below AAA as does Standard & Poor's at AA. Fitch has Spain at AA+, one from the top, even after the European Central Bank stepped in to buy its bonds to bring yields down from euro-era records. While Spain is ranked the same as Slovenia by Moody's and S&P, costs to insure its debt against default are twice as much.

"The rating agencies have got their head in the sand," Harvinder Sian, a strategist at Royal Bank of Scotland Group Plc in London. "Any country where you need the central bank in there supporting the bond market, and a AA rating, suggests something is very badly wrong with the ratings process."

Spain's borrowing costs have soared as the government struggles to rein in the euro region's largest budget deficit after Greece and Ireland, which has pushed the debt to almost twice the level of four years ago. The surge in the 10-year yield to 6.46 percent led the ECB to start propping up Spanish bonds on Aug. 8, and has knocked 120 basis points off that high. The cost of insuring Spanish debt against default rose to 390, CMA prices showed today, compared with 329 for Bulgaria. Spain's 10-year bond yields 5.33 percent, about 160 basis points more than similar maturity bonds of Thailand, which Moody's rates five levels less than Spain at Baa1.

Out of Sync

Markets also are out of sync with credit ratings in the U.S., which lost its AAA ranking from S&P for the first time on Aug. 5. While the downgrade upset global markets, bond investors ignored S&P's warnings about creditworthiness and bought Treasuries, pushing down the benchmark U.S. government bond yield to a record 1.877 percent on Sept. 12.

Debt insurance costs for the euro region's highest-deficit nations are soaring as growing expectations of a Greek default and concerns that Spain and Italy may be engulfed by the debt crisis are seen threatening a break-up of the euro. The euro weakened today for a second day after German officials rejected a proposal made by the U.S. at a weekend meeting of euro finance ministers to use ECB funds to bolster the firepower of the region's rescue facility. While concerns about a Greek default are pushing up yields, Spain's economic "fundamentals" haven't changed in recent months, meaning there's no need for a downgrade now, said Ioannis Sokos, a fixed income strategist at BNP Paribas SA.

Patience Needed

"We're in a time where some major decisions will be made on Greece, I would say it makes sense for the rating agencies to be a bit more patient," he said from London.

Spain's higher rating is also supported by a debt burden that was 23 percentage points lower than Germany's last year. Borrowing is set to rise to 67.3 percent of GDP this year, almost twice the level of 2007 when the country had its third- straight budget surplus. A rating cut now could reverse some of the recent decline in Spain's borrowing costs as it prepares to raise financing to pay 14 billion euros of bonds maturing on Oct. 31, its last redemption of the year. Spain sells treasury bills tomorrow and on Sept. 27, followed by a sale of three-year bonds on Oct. 6.

The government is trying to convince investors it deserves lower borrowing costs by implementing the deepest budget reductions in at least three decades, including public wage cuts, a freeze on pensions and tax increases.

Elections Looming

Spain holds elections Nov. 20 and opposition leader Mariano Rajoy, who leads in opinion polls, pledged stricter budget rules on Sept. 15 and said the government won't stray "under any circumstances" from the 4.4 percent deficit target for 2012. He reiterated a pledge today to cut "superfluous spending" by the administration in an interview on Cadena Ser radio. S&P and Fitch grade Italian debt two levels below Spain's, even though the spread in borrowing costs between the two nations is just 22 basis points, with Spain paying 5.36 percent on 10-year debt and Italy getting financing for a decade at 5.58 percent.

"There's a good chance we'll see converging of ratings, at least with the Italian ratings," said Lars Tranberg Rasmussen, a euro-region economist at Danske Bank A/S in Copenhagen. "The outlook is for lower sovereign debt ratings on Spanish debt."

Rating agency Moody's put Spain on downgrade warning

1st August 2011

Rating agency Moody's put Spain on review for a possible downgrade on Friday, adding to concerns that a Greek rescue package has done little to halt the spread of Europe's debt crisis. Moody's move to place the Aa2 government bond rating on review cited concerns over growth and said funding costs would continue to be high in the wake of euro zone leaders' bolder moves to curb the Greek crisis last week.

That added to a sense that Spain - and Italy - are still firmly in the firing line, and the euro and Spanish bond prices fell in response. Particular focus rested on Spain's regional governments, many of whom are struggling with burgeoning debt loads after a decade of reckless spending. Analysts fear control over regions' debt loads is slipping out of the central government's grasp. Regional authorities will miss their collective budget deficit target by up to 0.75 percent of gross domestic product (GDP), Moody's said, hampering the central government's program of austerity to reduce the overall shortfall.

Invesco Perpetual, however, remain positive on the prospects for the Spanish economy despite Moody's hinting it may downgrade the nation's credit rating. Luke Stellini, product director at the group, said Spain's fundamentals are unchanged following the Greek rescue package and the warning from Moody's, and the country is likely to "navigate its way to sustainability". Commenting on the rating, Stellini said: "This is clearly not a positive development in terms of sentiment. Having said that, Spanish bank share prices are not underperforming the broader European banks sector and Spanish bond spread widening has not changed dramatically, implying this move does not amount to a material incremental shock. "Our view is Spain is fundamentally capable of independently navigating its way to sustainability and is making good progress to doing that. Analysis also suggests current funding commitments via the EFSF are sufficient for Spain, should they be required. The reality, however, is markets need to be convinced further and it is down to eurozone politicians to provide this reassurance."

Spain worst hit in Bank 'Stress Tests'

15th July 2011

Eight banks failed the European Union's stress tests, with a combined shortfall of €2.5 billion in capital under a simulated worst-case economic scenario, the European Banking Authority said. The EU regulator said Friday that another 16 banks narrowly passed the tests, which examined the abilities of 90 top lenders across Europe to endure a deteriorating economy and strained financial system.

By awarding a relatively clean bill of health to the vast majority of Europe's banking industry, the tests are likely to be greeted with skepticism. Analysts and investors were bracing for as many as 20 banks to fail and to need to raise tens of billions of euros of new capital. Last year's tests, widely discredited for being overly lax and inconsistently enforced, saw seven lenders fail, with a combined capital deficit of €3.5 billion.

The new tests, under way since March, represent policy makers' latest bid to douse the Continent's financial crisis. The goal is to alleviate fears among investors, analysts, regulators and some bankers that lenders are sitting on huge undisclosed piles of risky loans and securities that could drag down the banking system and entire economies. The 2011 tests examined the abilities of banks from 21 countries to endure two years of rising unemployment, falling house prices and other adverse conditions that regulators regard as worst-case scenarios. Banks whose capital buffers would fall short of 5% of their risk-adjusted assets under the test will be required by the end of the year to raise new funds through selling stock or shedding business lines or assets. Those that can't will have to turn to their national governments for help.

Spain, whose economy and banking system are reeling from a collapsed real-estate market, is home to the largest number of failures, with five banks dipping beneath the 5% threshold, the EBA said. Another seven Spanish lenders barely passed, with capital ratios between 5% and 6%. Two Greek banks and one Austrian bank also failed the tests, the EBA said. In addition to Spain, the countries with banks that nearly failed are Cyprus (one bank), Germany (two), Greece (two), Italy (one), Portugal (two) and Slovenia (one). In Ireland, which had to accept an international rescue last fall after its banking system imploded, all three of the tested banks easily passed the tests.

The small number of failing grades reflects the fact that banks over the past year have scrambled to raise new funds in anticipation of the tests. The EBA said Friday that banks involved in the tests raised roughly €60 billion in the first four months of 2011. If the tests had been conducted based on banks' Dec. 31, 2010, financial positions, 20 lenders would have failed with a total €26.8 billion capital shortfall, the EBA said. EBA officials privately acknowledged that some of the tests' assumptions hardly amount to nightmare economic scenarios.

The EBA, a newly created London-based regulator, has been striving to run a credible process after last year's exercise was discredited. The seven lenders that failed the 2010 exam were either already nationalized or in the process of being merged into other institutions. That let regulators and policy makers off the hook for taking tough steps to fortify their banking systems. That was in contrast to the U.S. stress tests in the spring of 2009, which are widely credited with helping to defuse a financial panic. Nine of 19 top lenders flunked those exams and were required to drum up a total of $75 billion in new capital.

This year's EBA exams simulate a worse economic outlook and require banks to meet a higher capital threshold than the 2010 tests. Plus, the EBA is clamping down on banks' efforts to skirt the tests. For example, banks are no longer permitted to simply assert that their balance sheets will shrink and their profits will rise in order to cover potential capital shortfalls. Each bank's results were reviewed by regulators from another country, as well as by officials with the EBA and European Central Bank. "The European bank stress tests this year have done a poor job of building confidence," said Heinrich Haasis, president of the German Savings Banks Association, in a statement Friday. "The task now is to ensure that no additional uncertainty affects the markets."

Some Key Facts :

Moody's predicted 26 failures, Eurostat gives us 8.
EBA says 5 Spanish, 2 Greek, 1 Austrian Bank fail as of April 30;
EBA says 7 Spanish, 2 German, 2 Greek, 2 Portuguese barely pass.
EBA says 16 of 90 banks had core capital of 5% to 6% and will have to take action to improve capital buffers.
EBA says EU banks average CT1 7.7% in adverse Scenario, as of April 30.
The banks that have failed are Spanish: Unnim, CAM, Catalunyacaixa, Banco Pastor, Caja3

Spain and Italy's risk premium hit record highs.

11th July 2011

Spain's risk premium on Monday broke through 300 basis points for the first time since the euro came into existence as the debt crisis in the single-currency bloc extended its tentacles to Italy, sending shock waves through the single-currency system.

The difference between the yield on the Spanish benchmark 10-year government bond and the German equivalent closed at a record 335 basis points after opening at 307 basis points. It had closed around 285 basis points on Friday when contagion from Italy was already evident as doubts about the country's ability to service its debt grew. Italy's risk premium widened to 303 basis points, more than double the level it stood at in April.

In the Spanish stockmarket, the Ibex 35 index extended Friday's heavy losses and closed down 2.69 percent at 9,670.60 points. Banks suffered the brunt of selling across Europe. In Spain, Caixabank lost 4.29 percent, BBVA 4.06 percent and Santander 3.16 percent. That augured badly for Bankia and Banca Cívica, which are due to hold initial public offerings in what are regarded as key tests of the ability of savings banks that have converted to commercial banks to tap the markets. Portuguese government bonds also slumped, while the benchmark PSI-20 in Lisbon fell 4.28 percent.

The scene was set by European Union President Herman van Rompuy's decision to call a surprise meeting of EU leaders to discuss Italy and a second rescue package for Greece. Germany's Die Welt reported Sunday that the European Central Bank is seeking to double the size of the European emergency fund to 1.5 trillion euros.

Spanish Prime Minister José Luis Rodríguez Zapatero said Monday that "the process of a lack of confidence is spreading to more countries." Zapatero insisted that the reforms undertaken by his government are key to winning the confidence of investors. Spanish Economy Minister Elena Salgado said Italy can pull through without the need for financial aid. The Italian government is looking to push austerity measures of around 40 billion euros through parliament as part of its efforts to trim the country's budget deficit.

International Monetary Fund warns Spain on economic recovery

22th June 2011

The International Monetary Fund (IMF) has presented the results of its latest mission to Spain, and the general message is that there is still work to be done.

While the IMF welcomed the fiscal consolidation measures, the labour market and pension reforms, and the restructuring of the financial system, it also acknowledged that not enough has been done. The analysts at Barclays say that the evaluation generally coincides with their points of view on the weakness and strength of Spanish policies. They summarised the three main points:

FISCAL POLICIES

The IMF report praised the “decisive measures” adopted in mid-2010. However, it points out the fact that half of the regional governments did not meet their deficit targets and that the central government must do better.

According to the IMF, the 2011 deficit target of 6% of GDP should be within reach although additional measures will be needed if short-term risks materialize. The challenge for this year is that some regions could fail to meet their goals.

The experts at Barclays also fear that some regions might not reach their targets and that additional measures could be necessary, especially spending cuts, even if the central government has room to cover for those downfalls.

The IMF issued a series of recommendations such as a complete review of spending programmes to identify areas to cut, the creation of an independent fiscal board that could force fiscal credibility, and spending control mechanisms such as rules that could be applied to all government levels. Barclays believes that these ideas head in the right direction.

LABOUR MARKET

Barclays believes that this area is clearly where a lot more could be done. They signal that collective bargaining should be decentralised at the business level so that salaries adjust to the conditions of each company.

The British bank's analysts affirm that the current method of intermediate decentralisation with the major role of regional rules is “the worst of all alternatives.” The IMF believes that the reform presented by the Council of Ministers on June 10 has some promising clauses and that business groups should be able to take advantage of the opportunities of flexibility at the business level. However, the IMF warns that this flexibility should be strengthened... a more radical reform is needed. The IMF reiterates that salaries should be tied to productivity instead of inflation. Also, layoff cuts should be lowered to European levels and designed to make long-term hiring more attractive.

FINANCIAL SECTOR

The IMF insists for the government to be quick in resolving the problems of those entities that could not meet capital requirements on their own. It also affirms that the FROB (restructuring fund) should be strictly temporary and should seen as a measure of last resort when market conditions are poor.

In regards to the stress tests, the IMF recommends releasing all the data as well as the methodology used. It recommends for savings banks (cajas) to have more independent board members and for political representation to be reduced. Barclays says that this recommendation is critical. These analysts go further and say that the government should be ready to recapitalise the entire financial system in Spain once the public flotations are completed in September.

Spanish funds industry performs well

12th June 2011

The country’s economy may be suffering from the global downturn and its own excesses. But the domestic funds industry is doing somewhat better says Angel Martínez-Aldama, director-general of Inverco. Spain's economy is still battling with low growth and the highest unemployment rate (21.3%) of the whole European Union. The regional debt crisis is edging nearer, with neighbour Portugal becoming the third country in the eurozone to accept an EU and International Monetary Fund (IMF) bailout package worth €78bn over three years.

There are growing fears that if Spain is heading down the same route as Portugal, Greece and Ireland, the EU will not be able to afford another rescue deal. However, Spain's funds industry is doing slightly better than its general economy. Spanish inflows hit a five-year high in March, according to Inverco. The largest inflows for March of €511m were recorded by Spain's largest group, Santander Asset Management. Invercaixa Gestion followed closely behind with new in flows of €507m. The highest outflows were posted by Caixa Catalunya Gestion, with €181m exiting the group.

What is the composition of the Spanish funds industry and how has it been affected by the global financial crisis?

There are 2,500 investment funds registered in Spain, and five years ago we had 3,050 funds registered. In 2008, there were many funds that were just liquidated or merged with another. That is why the present number is 500 investment funds less.

Assets have been reduced by about 40% in the past three years. These were funds that involved and were invested in equities, and were not supported by investors. Part of those funds was investments in Asia or equities. The funds were transferred to other funds or redeemed. We saw a switch in investments from equities to short-term bond funds or from money-market funds into other vehicles. There was a switch because, with about 40% reduction at the time, the performance was terrible - and it shocked investors. It was the worst year in terms of performance in an 80-year history. The huge drop in returns made investors change their minds, and they tried to focus on less risky assets and move to more conservative funds.

The European debt crisis is still dominating headlines, and Spain is seen as one of the nations with a so-called ‘sick' economy. How healthy is the Spanish funds industry?

Even a month-and-a-half, or three months ago, there were possibilities that [the European debt crisis] would impact directly on Spain. However, after Portugal's bailout, the spread between German bonds (the strongest European economy) and Spanish bonds has been below 200 basis points. This means that, in principle, Portugal is not affecting the Spanish economy. A fter the reforms taken by the Spanish government in May last year (such as continuing to reduce the salary of civil servants and increasing the retirement age to 67 from 65), things seem to be getting more in line with the austerity measures the government is taking.

Of course, the situation is not perfect, but the credibility in the markets has shown in the spread between German bonds and Spanish bonds, which is now about 180. That reflects the outlook of the Spanish economy. I do not think the situation in Portugal will affect the Spanish funds industry because our funds don't invest in Portuguese debt.

Spain passes law to cap banker bonuses

6th June 2011

The Spanish cabinet on Friday approved a decree aimed at cracking down on the bonus mentality in the banking system, which almost brought the world economy to its knees through risky lending strategies.

The legislation incorporates a European Commission directive that seeks to reduce risks in the financial sector. The decree allows the Bank of Spain greater supervision over bankers' salaries and incentives and also aims to put a cap on a deposit war among funding-strapped Spanish lenders.

The decree was passed after Brussels last month gave Spain two months to incorporate its directive on capital requirements into national law. The EC wants to tackle "perverse pay incentives by requiring banks and investment firms to have sound remuneration policies that do not encourage or reward excessive risk-taking."

Spain - Signs of economic recovery - Some Key Points

1st June 2011

Macroeconomic scenario

Growth trend of the Spanish economy (3.4% average) above EU average (2.0%) over the last 10 years.
IMF estimates Spain´s GDP will rise again in 2011 (+0.7%) and will surpass France and Germany in 2013 (Spain +2.1%, France +2.0% and Germany +1.8%).

Spanish exports have grown consistently, placing it as 7th services exporter worldwide, 2nd tourism services exporter worldwide and 4th car exporter worldwide.
Domestic demand is holding but the key is export-led growth.
Contribution of external demand to growth 1.1% GDP in 2010.

Structural Reforms

The budget deficit has been reduced to 9,2% of GDP in 2010 from 11.1% in 2009, with the Government commited to reduce it to 6% this year and to reach the 3% target by 2013.

Measures taken recently bring forward planned expenditure cuts and strengthen the fiscal framework:

• More than 60% of total fiscal adjustment delivered in first 2 years
• Increase of revenue (VAT) and expenditure restraints have helped in 2010 to cut
sharply the public deficit.
•Central Government expenditure reduction ceiling of 7.7% for 2011
•New commitments from Spanish regions to expenditure reduction.

Spanish public debt to GDP is well under the Eurozone´s average (60% GDP vs 84.1% in 2010).

Spain sovereign debt remains solid, with its 10 year bond interest rate differential at around 200 basic points.
Spanish sovereign debt ratings remain of the highest quality (Aa2 by Moody´s, AA+ by Fitch and AA by Standard and Poor's), clear sign of confidence on the solvency of Spanish public accounts

Spain's ruling party hit hard in Local Elections : Financial markets falter

24th May 2011

Spain's ability to meet deficit reduction targets was thrown into doubt on Monday after voters angry about austerity and the EU's highest unemployment rate gave the ruling Socialists a fierce drubbing in local elections.

A week of protests by youths fed up with the stagnant economy and 21.3 percent jobless rate preceded the elections on Sunday, which left the Socialists without a single important mayoralty and only a handful of the 17 regional legislatures. Prime Minister Jose Luis Rodriguez Zapatero conceded the worse-than-anticipated defeat on Sunday night but said he would stay on to the end of his term in March next year, but the leader of the opposition repeated calls for early elections.

European stocks dropped to a one- month low after Spain’s ruling party suffered its worst election defeat in 30 years and Standard & Poor’s warned it may downgrade Italy’s debt. Banco Santander SA (SAN), Spain’s largest bank, and Italy’s Intesa Sanpaolo SpA (ISP) led a selloff in financial shares, both falling more than 1.5 percent.

The benchmark Stoxx Europe 600 Index dropped 1.7 percent to 274.78 at the 4:30 p.m. close in London, erasing its gain for the year. The gauge fell last week after Greek 10-year bond yields climbed to a record and Fitch Ratings cut Greece’s credit rating to B+, four notches below investment grade.

“Whilst the euro-area outlook deteriorates, the general buoyancy of financial markets has also disappeared in the last few days,” said Lee McDarby, head of dealing on the corporate and institutional treasury desk at Investec Bank Plc in London. “It seems this week will be pivotal to the immediate future of the structure of euro-zone debt, with announcements and further downgrades possible through the week.”

The euro touched a record low against the Swiss franc and reached its lowest in a week against the dollar after Spain’s Socialist Party suffered a defeat in local elections as voters punished Prime Minister Jose Luis Rodriguez Zapatero’s party for soaring unemployment and spending cuts. The 17-nation currency also fell after S&P on May 20 cut Italy’s credit-rating outlook to negative from stable, citing slowing economic growth and “diminished” prospects for a reduction of government debt. Italy’s Treasury said in a statement from Rome that it will “intensify” structural changes in the economy and push ahead with measures to balance the budget by 2014.

Spain facing the highest unemployment in Europe

2nd May 2011

The unemployment rate in Spain, already the highest in the European Union, rose to a 14-year peak of 21.29 percent.

According to the latest Survey of the Active Population (EPA) released Friday by the National Statistics Institute (INE), the number of people out of work jumped by 213,500 in the first quarter of the year to 4.91 million. The jobless rate rose by almost a full percentage point to 21.3 percent, more than double the average in the European Union and triple that of Germany. Using a different methodology, the European Union said Friday Spain's jobless rate stood at 20.7 percent in March, compared with an average in the bloc of 9.5 percent, and 6.3 percent in Germany.

In five provinces - Huelva, Málaga, Cádiz and Almería in the southern region of Andalusia, and Las Palmas in the Canary Islands - unemployment was over 30 percent. In Andalusia, the Canary Islands, Valencia and Extremadura and the North African enclaves of Ceuta and Melilla, over half of the working population of young people were idle. The number of households in which all members were unemployed climbed by 58,000 in the quarter to 1.38 million.

The economy shed over a quarter of a million jobs in the first three months, with 18.1 million people managing to stay in work. A further 43,000 people also withdrew from the labor market. Since the start of the crisis in 2007, the economy has lost 2.35 million jobs. The government said the job market had bottomed out. "We're at the worst moment," Deputy Prime Minister Alfredo Pérez Rubalcaba said.

"I'm not at all sure this is the peak," one analyst says

The administration insists the number of jobless will not reach the five-million mark, but Labor Minister Valeriano Gómez on Friday dismissed the relevance of that figure. "What is important is to create jobs, and to start doing so as soon as possible," he said.

The EPA coincided with a jump in inflation to just below 4 percent on higher food prices, while households were looking at steeper mortgage payments as the one-year euribor rate - the benchmark for setting the rates on home loans in Spain - ended the month at its highest level since February 2009 at just over 2 percent. Weak consumer confidence was also evidenced by a sharp fall in retail sales in February.

The Cabinet on Friday passed a decree aimed at flushing out black-market jobs in order to increase tax revenues and reduce official unemployment, but there was more than a dose of skepticism about how effective the measures would be.

How long this bleak scenario is likely to remain in place is a question of who you are willing to believe. The government expects activity to be moving at a sufficient clip to start creating jobs again at the end of this year, and predicts average unemployment will come in at 19.8 percent. But in a report at the end of last month, the Bank of Spain predicted the unemployment rate would continue to rise this year and would only begin to fall slightly in 2012.

The difference lies in diverging scenarios for the pace of recovery. Earlier this month, the government revised its economic forecasts for this year, halving its estimate for growth in consumer spending to 0.9 percent, but maintaining its prediction that GDP will increase 1.3 percent, with the export sector taking up the slack. The central bank's scenario, however, limits growth in output for this year to 0.8 percent, a figure that coincides with the International Monetary Fund and that of other experts.

"In the current scenario, with rising interest rates, I'm not at all sure this is the peak," Bloomberg quoted José Luis Martínez, a strategist for Spain at Citigroup in Madrid, as saying Friday. "The decline in employment, rising interest rates, and rising prices leave little margin for consumption to be reactivated."

Spain : Things are Improving

8th April 2011

Portugal has just applied for bailout funding from the ECB, which followed a downgrading by many financial rating agencies. Many have considered Spain maybe next, due to contagion spreading from it's neighbours. However analysis from economic experts, and a report from Morgan Stanley indicate that Spain has been on the mend, and may avoid a similar fate.

As long as it’s still dealing with balance-sheet repair, the Spanish economy is likely to stay weak. But the policy landscape has significantly shifted for the better. Morgan Stanley see seven reasons for being fundamentally more constructive on Spain’s ability to set itself apart from the smaller peripherals:

1. Growth divergence: Unlike Portugal and Greece, Spain should continue to grow – but at a subdued pace.
2. Measures to boost job creation should work: The labour market reform is a key step in the right direction.
3. The housing market: Prices might fall by up to 10% this year, but the construction bubble is now corrected.
4. More competitive than you think: Productivity is rising and unit labour costs are moderating.
5. Private sector deleveraging now happening: This rebalancing process is necessary and welcome.
6. Public sector belt-tightening on track: The deficit is narrowing and the pension system is being reformed.
7. Cajas – reforming the sector: Capital needs are still uncertain, but legislative changes are encouraging.

Like other major European economies, Spain is now expanding again. But, more than anywhere else, the strength of the recovery hangs crucially on whether the various imbalances are being corrected – and on where they are are in this process. As long as Spain continues to deal with balance-sheet repair, the outlook is likely to remain vulnerable to setbacks – potentially triggered by external shocks. Yet the policy effort has shifted gear. This should make markets more comfortable that the Spanish economy is fighting back, and help reduce contagion risks.

The consensus view is now too pessimistic on the Spanish economy, in Morgan Stanley's opinion. The latest published economists’ polls point to growth of around 0.6% in 2011. Morgan Stanley expect almost twice as much – and a pace of expansion of 1.5% in 2012. But that’s not even half the rate of growth seen during the decade prior to the financial crisis, and it’s far below government expectations. The economy appears to have stabilised. Spain expanded by 0.2%Q in 4Q, slightly better than the consensus and in line with expectations. This is a modest rate of growth, both on a cross-country comparison and relative to Spain’s own past. Still, it is a pick-up after the loss of momentum in the previous quarter.

Spain’s housing market bubble has been deflating for quite a while and construction investment – the main driver of the Spanish success story over the decade prior to the crisis – has now contracted sharply. However, with a smaller correction in prices relative to the other European housing market hotspots, the adjustment process is likely to stretch well into next year. At this stage, Morgan Stanley expect construction investment to contract outright in 2011 too, but much less than before. Despite a remarkable housing bubble, Spanish house prices have declined by about 15% from their peak in the first quarter of 2008. This compares with a peak-to-trough fall of around one-quarter in the UK, one-third in the US and one-half in Ireland. The first leg of the adjustment in the Spanish housing market had to do mainly with the volumes transacted rather than the prices of the transactions: sellers did not want to sell because they could not get an attractive price, thus triggering a fall in home sales. But even if the first leg of the adjustment had to do mainly with a collapse in the volume of transactions – which only recently seem to have found a plateau at a very depressed level – this does not mean that a further drop in prices will not follow. From this perspective, house prices are simply a lagging indicator, i.e. the second leg of the adjustment might well entail a more pronounced decline in house prices.

So the housing downturn in Spain is lagging behind that of other countries experiencing a credit-fuelled consumer and housing boom-turned-bust. Valuation measures, such as the house price-to-income ratio, suggest that house prices in Spain would still need to fall considerably to return to their ‘fair value’. In particular, they would need to decline by a further one-quarter or so just to bring this indicator in line with its long-term average. Of course, the indications from these measures should be taken with a pinch of salt. Analysts are not suggesting that Spanish house prices will decline by one-quarter from where they are now. The actual peak-to-trough fall will of course depend on many circumstances, ranging from the effectiveness of the policy measures to demographic factors.

Conclusions

The policy effort seems to have shifted gear. This should make markets more comfortable that the Spanish economy is fighting back, and reduce contagion risks.
While the short-term outlook still seems vulnerable, analysts believe that the Spanish economy can maintain an expansionary growth pathway, at a subdued rate.
Tentatively, it seems that the labour market reform might already be contributing to lower the unemployment rate. Wage moderation looks set to continue and hiring on certain contracts is picking up.
The housing market correction seems far from over. Analysts estimate that house prices could fall by up to 10% this year. This would weigh on activity, but the good news is that construction investment is now more in line with the historical norm.
Private sector deleveraging too has further to go. Yet households and firms are finally starting to rebalance. This process is welcome, but there are downside risks.
Spain is likely to have over-delivered on its 2010 deficit reduction targets and we think that further fiscal improvements are on their way. The pension reform is a further step in the right direction.
Banks – the extent of capital needs is still uncertain, but recent legislation will likely strengthen confidence in the Spanish financial system.

Eurozone's inflation rate could hamper recovery and growth prospects for Spain

2nd April 2011

Inflation in the euro zone accelerated further in March, increasing the likelihood of an interest hike by the European Central Bank, a move that could sit badly with both Spain and Portugal. According to a flash estimate released Thursday by the European Union’s statistics office Eurostat, the consumer price index for the single-currency block climbed to 2.6 percent last month from 2.4 percent in February.

The ECB’s medium-term target for inflation is close to, but below, 2 percent .Inflation in Spain in March was 3.6 percent, with the push from higher oil prices exacerbated by hikes in electricity rates and tobacco prices as well as the increase in value-added tax introduced. The ECB’s president, Jean- Claude Trichet, last month indicated the bank was prepared to raise official rates in response to a jump in inflation as early as April. The ECB’s key lending rate has been at 1 percent since July 2008. The ECB is due to hold its next monetary policy meeting on April 7.

However, Trichet also hinted that any rate hike was likely to be one-off, although he qualified that by adding that the trend depended on events in Libya. In response to Trichet’s warning, Spanish Economy Minister Elena Salgado said Spain could absorb an increase in borrowing costs “without problems” but also conditioned that assertion on the magnitude of the rise. Spain is slowly emerging from its worst recession in living memory and interest rate hikes would doubtless hamper its recovery. The Bank of Spain on predicted GDP would rise by only 0.8 percent this year, compared with the government’s growth forecast of 1.3 percent. However, the central bank also attributed the jump in inflation in Spain to one-off factors and forecast that it would slow to around 2 percent by the end of the year in the absence of socalled second-round effects.

Portugal, meanwhile, faces a double whammy. The weakness of the domestic economy has compounded the country’s debt crisis, with yields on government bonds now trading at euro-era record highs, with the rate on five-year bonds above 9 percent and the 10-year at over 8 percent. The Bank of Portugal earlier this week predicted the economy would shrink by 1.4 percent this year. That compares with a revised forecast by the government of a drop of 1.2 percent in GDP.

A further rise in borrowing costs as a result of ECB rate hikes could be another reason for the Portuguese administration to bow to the inevitability of seeking a bailout from the European emergency fund. While Spain has for the moment managed to decouple itself from its neighbor, it too has embarked on a painful austerity drive to rein in its public deficit; and the government does not need to be reminded about how fickle the financial markets are.

Moody's debt downgrade has little impact on debt market

18th March 2011

The debt markets are saying that Spain will make it through the euro crisis without a bailout or a default. Even though Moody’s downgraded Spanish debt. The Credit Default Swap Rate fell 5% yesterday (Thursday 17th) and is currently down 2% today. Recent bond auctions (click here), have seen a lowering in interest rates, suggesting a positive outlook on Spain's debt.

It’s not so much that the markets disagree with Moody’s move, as that this downgrade has been in the works -- and baked into the market -- for weeks. The weakness in Eurozone debt is a vote that nothing significant will emerge from the latest round of talks on solving the euro debt crisis. At the same time, the debt markets are also saying Portugal will need a rescue (34% chance) and that there’s a 60% chance of a Greek default. The markets give Ireland a 40% chance of default.

These reads all come from the market for credit-default swaps. Credit-default swaps give the buyer protection against default of a country’s bonds for five years -- for a price. The higher the price, the greater the odds -- in the market’s opinion -- a country will default within five years.

Moody's cuts Spain's rating to Aa2 with a negative outlook

10th March 2011

Spain’s credit rating was cut to Aa2 by Moody’s Investors Service, which said the cost of shoring up the banking industry will eclipse government estimates. The euro fell and Spanish bond yields rose

Spain, which used to hold top-notch triple A ratings from all the main rating agencies, saw its ratings cut one grade to Aa2 by Moody’s Investor Service. The agency warned that the eventual cost of restructuring the banks will exceed the government’s current assumptions of €20bn. Moody’s said the costs could rise to as high as €50bn.

Moody’s said: “There is a meaningful risk that the eventual cost of the recapitalisation effort could considerably exceed the government’s current projections.

Spain will spend as much as 50 billion euros ($69 billion) shoring up savings banks, Moody’s forecast, more than double the 20 billion-euro price set by the government. The risks to government finances remain “skewed to the downside,” the company said in a statement today. The outlook is “negative,” suggesting more rating cuts are under consideration. As Spain tries to convince investors that struggling savings banks won’t overburden its public finances, European leaders have set a March 25 deadline to approve a package of measures to end the sovereign debt crisis. The Bank of Spain is due to announce today the capital shortfalls of lenders.

“The crisis in the euro region is going to take a long time to resolve, and the rating downgrade of Spain is a reflection of that,” said John Stopford, head of fixed income at Investec Asset Management in London, which manages about $80 billion. “Any expectation that meetings in March are going to lead to a quick solution is a bit naïve.”

The gap between Spanish and German borrowing costs widened 9 basis points today to 231 basis points, the highest in five weeks as the yield on 10-year notes rose 3 basis points to 5.50 percent. The euro slid 0.6 percent to $1.3825 as of 7:18 a.m. in London. Moody’s had put Spain’s rating on review on Dec. 15, after lowering its credit grade to Aa1 from Aaa in September. Fitch Ratings, which calls Spain AA+, changed the outlook to “negative” on March 4. Standard & Poor’s rates the nation AA, after stripping it of its top AAA grade in January 2009.

Moody's Downgrades Ratings of four regions in Spain

Moody’s Investors Services on Friday downgraded the credit ratings of the Spanish regions Castilla-La Mancha, Catalonia, Valencia and Murcia after they failed to meet the target set by the central government for reducing their budget deficits last year. The move comes a day after the agency downgraded Spain’s sovereign ratings by a notch, citing the costs of the recapitalization of the banking sector and the problems the country’s regions face in reducing the shortfall in their finances.

Castilla-La Mancha’s longterm issuer and debt ratings were cut to A2 from A1, Catalonia’s to A3 from A2, Murcia’s to A1 from Aa3 and Valencia’s to A2 from A1. The agency said the downgrades reflect the “wide deviations registered by these regions from the deficit limits set for 2010 and the subsequent difficulties Moody’s anticipates they will encounter in controlling their deficit and debt projections in 2011-12.” It said the budget forecasts of the four regions over the past few years had also been “unreliable.”

Spanish Central Bank sees Spain on Slow Track to Recovery

7th March 2011

The Bank of Spain said Friday the domestic economy continued its slow recovery at the start of this year, with signs of a pickup in the consumer sector and investment. “Although still scant, the indicator for the first few months of 2011 point in general to a continuation of the path of slow recovery, with characteristics similar to those seen at the end of last year,” the central bank said in its monthly economic bulletin for February.

Spain’s GDP posted quarteron-quarter growth of 0.2 percent in the last three months of
2010 after coming to a standstill in the third quarter. Output was up 0.6 percent on an annual basis. For the whole of last year, GDP contracted 0.1 percent, beating an initial estimate by the government of a 0.3-percent drop. Spain emerged from its worst recession in living memory at the start of 2010. The bank’s report said indicators relating to private consumption had been “positive” at the start of the year.

“Specifically, consumer confidence underwent a clear improvement in January and above all in February,” the report stated. The state-owned lender Instituto de Crédito (IC) said Thursday that its consumer confidence index climbed from 70.7 points in January to 73.4 points last month on the back of improved expectations for the economy and labor market in the next six months. The central bank said investment in capital goods was also in general “favorable” at the start of the year. The Bank of Spain’s report was released just a day after European Central Bank President Jean-Claude Trichet dropped a strong hint that the ECB could raise interest rates by as early as next month to rein in growing inflationary pressures. Higher borrowing costs would sit badly with Spain, which is still struggling to get its economy moving again, while simultaneously embarking on a drive to rein in its public deficit. As a result of the
latter, public spending contracted at the start of the year.

Industrial output Separately, the National Statistics Institute (INE) said Friday that industrial output at the start of the year saw the greatest increase since March of last

year. The INE said the industrial production index climbed 3.8 percent in January from a year earlier after correcting for differences in the number of working days. The index contracted by 0.1 percent in December. Consumer durables output climbed 4.1 percent, capital goods rose 4.6 percent, intermediate goods 4.8 percent.

28th February 2011

ExonnMobil uses Spain as tax haven to avoid tax on 9.907 Billion Euros of net profit

The one and only employee of ExxonMobil Spain would certainly be in favor of Chancellor Angela Merkel‘s proposal to link wages to profits. In two years, the company, an affiliate of the oil giant ExxonMobil, recorded Euros 9.907 billion in net profits. For practical purposes, the money is really net surplus; the company did not pay a single euro of taxes on the gains.

Like many other multinationals, Exxon has found its own private tax haven in Spain. Exxon is utilizing a completely legal tax structure known as entities holding foreign securities (ETVE). Using this structure can be called financial engineering or tax planning but not fraud, unless proven otherwise.

ExxonMobil is the world’s largest company in stock value and the first in turnover, with 2009 revenues of $3.832 billion. In Spain and Portugal it used to operate under its Esso brand with a network of 130 gas stations, which were sold to Portugal’s Galp in 2008. But Exxon also has another company in Spain: one that is far more discreet and out of the spotlight; one that moves billions of euros a year. Exxon is one of many multinationals that were attracted by Spain’s creation, in the mid-1990s, of a holding company system with a privileged tax liability. The justification for this type of company is to avoid international double taxation.

In other words, the profits generated by a company’s affiliate in one country are not taxed twice: once in the affiliate’s country and again in the parent company’s country. But business and tax advisor have found ways to use the loopholes offered by the system — both in tax havens and respectable jurisdictions — to achieve
the opposite: taxes are not paid in either country.

During 2009, ExxonMobil Luxembourg paid ExxonMobil Spain a dividend of Euros 3.650 billion Under the so-called parentsubsidiary directive, “such income was not subject to foreign withholding tax” and in Spain was “tax-exempt due to the ETVE system.” In turn, ExxonMobil Spain paid its parent company in theUS dividends of Euros 2.265 billion, which was also tax-exempt due to the ETVE structure. In addition, the holding companies paid Euros 1.384 billion in premium issue to its US parent, also exempt.

The money went from Luxembourg to the US without any taxes accruing, thanks to its trip to Spain. But this is not unheard of. Google uses tax structures in the Netherlands, Ireland and tax havens to pay only 2.4 percent on its profits outside the United States, according to Bloomberg, which confirms that Facebook is setting up a similar structure.

The Spanish system is very advantageous yet also well-regarded due to certain inbuilt safeguards. Yet these safeguards do not prevent tax engineering maneuvers. Practices
such as sub-holding and capitalization have made the structure a focus of increased risk of fraud, according to the country’s Tax Office. In Spain, multinationals such
as Vodafone, Hewlett Packard, American Express, General Mills and Eli Lilly have used ETVEs to channel their interests in foreign companies. Some of these have only one employee.

The lone worker at Exxon- Mobil Spain earned Euros 44,000 in 2009. A pittance, given that his company brought in Euros 5.333 billion.

Though ETVE companies are not by definition fraudulent, their mere existence “increases fiscal risk,” according to a spokesman for the Tax Office. The instrument was created in 1995, when Spain saw its neighbors — the Netherlands, Belgium, Denmark, Switzerland, Sweden and Ireland—benefiting from foreign investment by using similar structures and wanted a piece of the pie. But, as with other legislation, Spain tried to go further and enhance the fiscal advantages for ETVEs set up here with respect to their European counterparts. As a result, the rules are somewhat lax. The legal requirement for a company to have material and human resources in order to carry out its activity often results in ridiculous situations such as Exxon’s single employee. Furthermore, though ETVEs do not have to pay taxes on their gains, they can deduct losses, receiving money from the public coffers. Therein lies the potential for fraud. An ETVE can take out a loan to buy foreign shares and deduct the interest expense. The problem is compounded given that these companies have the possibility to consolidate their accounts with their parent company. Thus, losses generated by an ETVE can offset the profits of other affiliates, and the group as a whole pays much less, or even nothing in extreme cases. “Many resources are ded icatedeach year to control this,” says a Treasury official. But a Treasury spokesman says that no changes to the structure are foreseen, nor to the corporate income tax. While acknowledging that shortcomings may exist, the government believes that any changes now would generate uncertainty. (source El Pais, Bloomberg)

18th February 2011

Biggest Chinese business park opens in Spain

MADRID - The biggest Chinese business park in Spain opened Thursday in the town of Fuenlabrada, just south of Madrid.

The "Plaza de Oriente" (Square of the East), located in the Cobo Calleja industrial estate, which already houses many Chinese owned businesses and warehouses, mainly trades clothes imported from China.

The park cost around $50 million to build, and houses 80 Chinese-owned companies in an area of 40,000 square meters. Overall the center will lead to the creation of around 1,000 jobs. A second phase of construction will create a space for a further 250 companies and a luxury hotel.

Zhu Bangzao, the Chinese ambassador to Spain, attended the opening ceremony along with Spanish Public Works Minister Jose Blanco and the Fuenlabrada Mayor Manuel Robles. Dragons, balloons and music were all present in a colorful opening ceremony after which Blanco gave a speech in which he applauded China's economic growth, which has made the country the second most important economy on the planet.

"China is no longer the world's factory. It is now the marketplace of the world. For that reason, China gives an opportunity to Spain, but Spain has also to offer opportunities to China and for that reason our country has to increase its competitiveness," Blanco said.

"Commercial exchanges between our two countries have continued growing in recent year, with China now being Spain's fastest-growing import and export market," he said.

10th February 2011

Banks need 17 Billion Euros in recapitalization - BBVA report

The research department of BBVA, Spain’s second biggest lender, estimates local banks would need between 13 billion Euros and 17 billion Euros in additional capital to meet the government’s tougher solvency requirements. The government last month said it was raising the minimum core capital ratio from 6 percent to 8 percent of risk-weighted assets. In the case of banks with limited access to private capital, the ratio has been set at between 9 and 10 percent. The government at the time estimated banks would have to raise 20 billion Euros to meet the new requirement.

The government’s Orderly Bank Restructuring Fund (FROB) and the Deposit Guarantee Fund have already injected 15.5 billion Euros into local savings banks, or cajas. “The solvency problem in Spain is limited both in size and the number of institutions even in the case of the new core capital requirement of 8 percent,” BBVA said in its latest report on the outlook for the Spanish economy published Wednesday. BBVA forecast the Spanish economy would grow 0.9 percent this year, well below the government’s estimate of an increase of 1.3 percent. It expects the pace of activity to pick up to 1.9 percent in 2012, compared with the government’s figure of 2.5 percent.

BBVA predicted that growth this year would be insufficient to bring the unemployment rate back below 20 percent. BBVA’s chief economist for Spain, Rafael Doménech, said activity was likely to be driven by exports. “The good news is in the foreign sector,” he said. “As in the 1990s, the Spanish economy overcame its crisis on the back of higher exports, but unlike then, since recourse to the advantages of a devaluation is no longer an option, it is based on the more virtuous route of an enhanced effort by companies.”

9th February 2011

The Taxman Cometh : Spain cracks down on Tax Evasion

Spain’s Tax Office (AEAT) will be paying closer attention to professionals they suspect of failing to fully declare their income, and those claiming unemployment benefit while working on the side, in an effort to bring a greater portion of the country’s underground economy to the surface.

At a time when the government is striving to fill a huge hole in its finances, the AEAT’s action plan for 2011 was presented Monday in the official gazette. Tax officials are being asked to be on the lookout for professionals with signs of wealth that are incongruent with their tax declarations.

They will also be trying to keep tabs on false declarations of expenses. In their battle with tax cheats, inspectors will step up joint action with their colleagues in the treasury and labor arms of the Social Security system, and will make visits to businesses where undeclared activity is suspected

7th February 2011

GDP Rises 0.2% at end of 2010, driven by Export Sector

The Spanish economy picked up again at the end of last year driven by external demand after having stalled in the third quarter, the Bank of Spain said Friday. In its first monthly economic bulletin of the year, the bank said GDP climbed 0.2 percent in the fourth quarter from the previous three months when output was unchanged. Compared with the end of 2009, the economy grew 0.6 percent. For the whole of 2010, the economy shrank 0.1 percent, an outcome better than the government’s initial forecast of a fall of 0.3 percent.

“It is positive that Spanish growth in 2010 — if the Bank of Spain’s figures are confirmed — are above forecast,” Reuters quoted Xavier Segura, the head of the research department of savings bank Caixa Catalunya, as saying.

The National Statistics Institute is due to release its flash estimate for final quarter growth on February 11 and a breakdown of the figures five days later. The economy shrank 3.7 percent in 2009 as Spain suffered its worst economic crisis in living memory. The country eventually emerged from almost two years in recession in the first quarter of last year, but growth has been at best anemic, with Spain lagging behind the rest of the euro zone. The recovery has been constrained by the government‘s austerity drive to rein in its yawning public deficit, with hikes in taxes and duties, an average 5-percent cut in public sector wages and greatly reduced outlays on public works, which has put a damper on domestic demand. (EL Pais)

21st January 2011

The case for an early Spanish bailout

Speculation Spain will need a bailout has abated but volatility is high, nerves are frayed and some experts say Madrid should tap emergency funding now to pre-empt the next wave of attacks on its sovereign bonds. The wolves have been kept from the door by well-subscribed debt auctions -- the Treasury has issued 14.5 billion euros of debt in the last week -- and an aggressive commitment to economic reforms and spending cuts, but the peace won't last.

Any sign of weakening resolve, either from the Spanish government or from euro zone leaders on the development of their European Financial Stability Facility rescue fund could provoke a new round of sell-offs of Spanish debt. Spain's ruling Socialists say they do not need outside help and most analysts agree.

A Reuters poll of 51 economists this month found 44 predicting Portugal would need a bailout similar to the aid given to Greece and Ireland. Only seven of them said Spain would need the same treatment. But nagging investor concerns have kept premiums demanded on benchmark Spanish bonds over the equivalent German Bund near euro lifetime highs and the cost to insure Spain's debt against default at levels similar to those of Iraq and Lebanon.

Merrill Lynch currently puts the probability of Spain seeking outside help this year at 41%.

"The handling of previous rescue packages indicates that reactive rather than proactive action by policymakers may not suffice to re-establish investors' confidence, and we now see increased urgency for policymakers to try to get ahead of the curve," economist at Unicredit Tullia Bucco said.

Spain's Achilles' Heel is its banking system.

Split evenly between internationalised commercial banks such as Santander and BBVA, and debt-stricken, regional, unlisted savings banks, the sector could be as serious a liability for Spain as it was for Ireland. This is where a pre-emptive strike would help.

A 100 billion euro package would recapitalise the banks -- which have a shortfall estimated at 20 billion to over 100 billion euros -- and settle nerves over the system's weaknesses.

"By reducing the uncertainty on the recapitalisation of the banking sector and lowering chances of a negative feedback loop between banks and the sovereign, the move should have a positive impact on government bond yields," says Bucco.

A full sovereign bailout for Spain on the scale of that offered Greece and Ireland could be more than 400 billion euros, according to estimates, more than the EFSF could handle. Concentrating on Spain's banks would make the package more digestible, especially for euro zone paymaster Germany. The government says it is working on a new round of recapitalisation, after reforms cut the number of savings banks to 17 from 45 in 6 months, but says the money will not come from its own coffers.

"Where do you find the money for the savings banks? If the money has to be raised through the government, at what rate? That issue has not gone away. This problem has not been fundamentally addressed," economist at Merrill Lynch Guillaume Menuet said.

"I want to see those banks recapitalised before I turn positive on Spain."

Bumpy road

Despite recently improved sentiment, Spain faces a bumpy road this year and a confidence-shattering shock could come from a number of sources.

"The threats are profound ... We continue to believe that the probability of Spain needing a bailout is still low, but accept the risks have risen and are likely to linger well into 2012," said Raj Badiani, economist at Global Insight.

Unexpected bad news on the economy, which barely avoided tipping back into recession in 2010, or worse-than-expected deficit news from regional governments, could fuel concerns as could any weakening of the ruling Socialists' power base. Local and regional elections in May could erode the essential small-party backing the minority government has in parliament, hobbling Prime Minister Jose Luis Rodriguez Zapatero until general elections in 2012.

Failure to push through long-promised reforms, such as raising the pension age to 67 from 65, due at the end of January or extensions to labour market reforms could also act as a tipping point for the perception of Spain as a viable economy. Debt redemption humps in April and July and October will be met with the same scepticism and rising rates as the last big payment in July, even though they passed without incident.

If the government accepted aid for the banks alone there would be less stigma than an aid plea for the sovereign, though this argument is unlikely to win many supporters in Madrid after repeated insistence the banks and the economy are solid. However, if the situation turns nasty again, Zapatero could be forced to make the difficult choice between saving Spain from the doubting investor and saving face before the electorate.

4th January 2011

Sharpest Decline in Spanish Unemployment in a decade

The number of unemployed people in Spain dropped by 10,221 to 4.1 million in December, recording the steepest decline since 2000, the ministry of employment and immigration said on Tuesday. Spain, the fourth-largest economy in the euro zone, is facing the highest unemployment rate in the eurozone at around 20 percent.

Last month, Moody's Investor Services said that it had put Spain's Aa1 debt rating under review for a possible downgrade taking into account the large debt burden of the country and its funding needs next year. The nation will need 170 billion euros ($228 billion) next year.

Budget deficit of Spain, which accounted for 11 percent of country gross domestic product in 2009, was the third-biggest in the euro region.

Madrid introduced stringent austerity measures six months ago to save 15 billion euro and avert a debt crisis. This included civil servant salary cuts and scrapping of bonus payments to new mothers.

23rd December 2010

Christmas Spanish Lottery hands out $3 Billion

Spain's beloved Christmas lottery sprinkled 2.3 billion euros ($3 billion) in holiday cheer across the country Wednesday, handing out winnings eagerly welcomed by a nation facing 20 percent unemployment. One of the most awaited days of the year in Spain served up merry moments for people struggling to make mortgage payments and pay bills, or those seeking jobs. One lottery vendor said he had hired a medium to lure good luck.

The government-run lottery billed as the world's richest has no single jackpot but operates a complex share-the-wealth system in which thousands of five-digit numbers running from 00000 to 84999 win at least something. It is known as "El Gordo" (The Fat One) and dates back to 1812.Tax-free winnings range from the face value of a 20-euro ($26.31) ticket — in other words, you get your money back — to a top prize of 300,000 euros ($394,650).

The sweepstakes, which goes on for three hours, informally ushers in the Christmas season. Many Spaniards spend the day glued to TV sets, radios and computers, waiting to see if they are among the lucky. People often team up to buy shares of tickets sold by bars, sports clubs and business offices.

One bar in Palleja, a town near Barcelona, sold 600 of the top-prize tickets — that top-fetching number was 79250 — worth a cool 180 million euros ($236.8 million). Its owner, Jose Antonio Maldonado, was ecstatic over being able to help people in need during hard economic times. He sprayed a bottle of sparkling white wine in the air as a jubilant crowd roared.

"I know a lot of people who are drowning in the economic crisis and who bought a ticket in my bar. I feel like Robin Hood," he said. "In my entire life I have never cried as much as I did this morning."

In Alcorcon, a town just outside Madrid, lottery office manager Augustin Rubia said he hired a medium to cast a magic spell over his outlet, and set up altars outside with religious statues, candles and tarot cards, and it all worked: he sold 10 top-prize tickets to the tune of 3 million euros.

"The idea was to lure positive energy," Rubia told reporters, adding that all the winners are working-class people.

In Cerdanyola del Valles, another town near Barcelona, unemployed worker Fernando Sanmartin hit it big with 79250 the very day his 900-euro ($1,200)-a-month jobless benefits ran out, the newspaper El Mundo reported, without saying how many tickets he had bought. Sanmartin said he would use the money to remodel his kitchen and give some to his three children. The government agency that runs the lotteries, known as LAE, usually diverts to prize money about 70 percent of the total amount that people gamble, and keeps the remaining 30 percent.

Children from a Madrid school that used to be a home for orphans pick small wooden balls bearing the winning numbers and prizes out of two giant golden tumblers, and sing them out in a time-honored tune known to every Spaniard. To complicate things further — and ensure the money trickles down as much as possible — each number appears on 1,950 20-euro coupons.

This year tickets bearing the number 79250 were sold in the Madrid and Barcelona areas, Alicante in the east and other cities ranging from the Basque region in the north to Tenerife in the Canary Islands. The most commonly won amount for a 20-euro coupon is 100 euros ($131.55). In lottery-crazed Spain — there are easily a dozen others beside the Christmas one — sales of El Gordo tickets remained stable from last year despite the country's severe economic woes.

Spain is struggling to emerge from nearly two years of recession triggered by a burst real estate bubble. It has slashed public sector wages, frozen retirement pensions and raised VAT sales taxes in a bid to convince markets it is not heading toward a bailout like Greece and Ireland.

On Tuesday, Spain's Parliament passed a 2011 austerity budget by a razor-thin margin, saving embattled Prime Minister Jose Luis Rodriguez Zapatero his job. Spaniards are traditionally superstitious about picking their lottery numbers and this year was no exception. The number 11710 sold out in just two hours. The number was symbolic of Spain's World Cup triumph in South Africa on July 11, 2010.

22 December 2010

Spanish debt auction

Hopes for a quiet end to 2010 for the euro were bolstered by news that Spain, widely seen as the biggest potential risk to the health of the currency, had successfully auctioned $5.3 billion in three and six month notes on Tuesday.

A total of $4 billion in three-month bonds was sold at an average yield of 1.8%, compared to 1.7% in the last sale in November. The interest rate on the six-month notes rose to 2.6% from 2.1%. Both auctions enjoyed a healthy bid-to-cover ratio, indicating that investors had taken heart from the news this morning that China had taken concrete steps to support the euro. The successful sale of notes will come as a relief for Madrid, as the Spanish parliament is planning to pass a new austerity budget for 2011. The government had faced strong opposition from other parties, who said that the measures were too harsh for a country enduring unemployment rates of 20%.

17th December 2010

Spain's Bad Loan Ratio hits highest in 14 years

MADRID (AP) — Spain's central bank says the bad loans ratio for the country's banks and financial institutions rose to 5.66 percent in October, its highest in 14 years. The bank said Friday said that of total loans of euro1.83 trillion ($2.42 trillion), bad debts accounted for euro103.7 billion in October, up from euro101.3 billion in September.

Spain's shaky banking sector is a key factor in Europe's effort to keep its government debt crisis from spreading. Greece and Ireland have already needed bailouts, with heavy banking losses helping push Ireland into needing a rescue. Spanish banks have been saddled with foreclosed property since the collapse of the key real estate sector.

Moody's ratings agency this week said it was maintaining its negative outlook for Spanish banks and would review the country's debt rating for possible downgrade.

16th December 2010

Spain put on debt watch by Moody’s

(AFP) Ratings agency Moody’s warned Spain on Wednesday that its debt rating could be downgraded, pushing Spain back into the euro zone debt spotlight ahead of an EU leaders’ summit starting on Thursday.

Moody’s said it was concerned about Spain’s high debt funding needs, its heavily indebted banks and its regional finances, but said it did not expect Madrid to have to resort to an EU bailout like Greece and Ireland. Spain, which with Portugal has come under intense market pressure in recent weeks, raising concerns it could be driven into a bailout, needs to refinance around 60 billion euros of debt early next year, according to JP Morgan research.

Both the cost of insuring Spanish debt against default and yields on its 10-year government bonds rose on Wednesday, an indication of the increased risk attached to Spain. Spain’s Economy Minister Elena Salgado said market movements were being exaggerated by thin volumes at year-end, but said it also made sense to enlarge a European financial rescue fund to make sure it could tackle the crisis.

EU leaders meet in Brussels on Thursday and Friday for their end-of-year summit, with the region’s year-long debt crisis and efforts to better tackle it the central issues on their agenda. As well as approving a change to the EU’s treaty demanded by Germany to create a permanent system for handling crises from mid-2013, the leaders will discuss how they can improve the current temporary crisis resolution mechanism -- a 750 billion euro ($1 trillion) joint EU/IMF loan facility.

One possibility is to increase the size of the fund. Belgian Finance Minister Didier Reynders said the EU’s portion, 440 billion euros, could potentially be doubled to fend off the threat of renewed market pressure on Portugal and Spain, and Spain’s Salgado backed the idea of a larger fund. “What we think is reasonable is that the real capacity of the fund coincide with the theoretical capacity,” she said, pointing out that while it is 440 billion euros in theory, credit guarantees make it smaller than that in practice.

German Chancellor Angela Merkel said no country in Europe would be left on its own, and reiterated that the euro was a strong currency that would be defended to the hilt.

15th December 2010

Spain's Economy by Numbers

Spain's economy, the fifth largest in Europe, is struggling hampered by a property crash, large debts and high unemployment. Here is a snapshot of the economy
The main numbers on Europe's fifth largest economy, Spain.

Spain's unemployment rate of 19.7pc is the highest in Europe.

€560.5bn - The amount of Spanish government debt.

53.2pc - Government debt as a percentage of GDP.

78.7pc - Eurozone government debt average.

€117.3bn - Government deficit.

11.1pc - Deficit as a proportion of GDP in 2009. Spain wants to reduce this to 9.3pc in 2010, and eventually to 3pc in 2013.

-3.6pc - Real GDP growth in 2009.

€6bn - The amount Jose Luis Rodriguez Zapatero, Spain's prime minister, said Spain would slash its public spending by to avoid sliding into a debt crisis.

13,000 - The amount of civil service jobs to be axed this year, with public sector wages frozen in 2011.

5pc - The pay cut to be taken by remaining civil servants under these measures.

20.8pc – Spain’s unemployment rate, the highest in Europe.

12.8pc – The amount Spanish house prices have fallen from the market’s peak in 2008.

1.2pc – Spain’s underlying inflation rate, excluding energy and food costs.

0.3pc – Amount Spanish economy will contract in 2010, according to IMF. It has forcast growth of 0.7pc in 2011.

Note : These are based on official Spanish reports, which have been the question of much debate by economists. The fall in housing prices is seen as unrealisticly low.

6th December 2010

"Spain will not seek financial aid" : States Finance Minister

PARIS (Reuters) - Spain has sound economic fundamentals, and the country will not appeal for financial support from the international aid mechanism, Spanish Economy Minister Elena Salgado said in an interview published on Sunday. Spain announced a range of deficit cutting measures on Friday as it fought to calm investor nerves over credit-worthiness issues, reduce a high budget shortfall, and shake off concerns that it could need a financial bailout.

Bond markets have been punishing Spanish sovereign debt over concerns Spain will not be able to cut its deficit, although its relative cost of borrowing has pulled back from record highs on reports of the European Central buying its bonds.

"No. None of our fundamentals justify it," Salgado told French business daily Les Echos when asked if Spain would appeal for a financial bailout from the European Union and other lenders.

The minister has called for systemic reform to deal with the debt crisis, whose spread to Spain would likely exhaust the rescue funds set aside by the euro zone to deal with it. But she said that increasing the size of the European Stability Fund designed to extend aid to member states in financial difficulty was "not the question for the moment. Today, we need to show clarity, determination and coordination."

"Markets need to know that European institutions and countries will do everything to ensure the stability of the euro," she added.

Spain's public deficit stood at 11.1 percent of gross domestic product in 2009 and analysts have long warned extra measures would be needed beyond an austere 2011 budget and promised labor market reforms to bring it down. Salgado said that Spain's property crisis, a source of worry for investors concerned about the health of Spanish lenders, was over and that the country would meet its official full-year 2011 growth target of 1.3 percent.

"We think we will be able to maintain our forecast. We think there is room (for growth) in private consumption," she said.

Germany and France have said the Irish bailout has saved the euro by laying the foundations of a permanent plan for dealing with government debt. But investors are increasingly convinced that Portugal and eventually Spain will have to be bailed out.

Is a Bailout Needed ?

Ask just about anybody if Spain needs an Ireland-style bailout and the resounding answer will be ‘no.’

Traders, economists and fund managers are almost unanimous in their belief that Spain is very different than Greece, Ireland and even Portugal in that it is solvent and has control of its own destiny. That was echoed by Spanish prime minster Jose Luis Rodriguez Zapatero who ‘absolutely’ ruled out a bailout on Friday.

This week the European Commission said Spain’s economic recovery is on track and the country has made good progress cutting its debt.

The Commission said that the country’s economic output will grow by 0.75% in 2011 and by 1.75% the following year. And it said Spain – which has already cut its deficit to 9.25% of GDP from 11.1% - is on track to more than halve its deficit to 5.5% by 2012.

That compares pretty favorably to Ireland’s deficit which will be 32% of GDP this year.

But isn't the economy in a mess?

There are definitely areas of concern. The commission said on Monday that it expects one in five Spaniards to be out of work by 2011 and unemployment will fall only ‘moderately’ the following year to 19%. There are also clear signs of stress in the country’s housing market with bad loans expected to keep on rising.

That means many commentators are worried about the health of Spain’s banks. Goldman Sachs analyst Jernej Omahen warned Spain’s banks will report total credit losses of €145 billion as a result of the crisis. ‘Were confidence to deteriorate further, this would no doubt severely impact the banks’ funding position, with negative balance sheet and profit & loss effects,’ he said.

Nicholas Spiro, who runs research group Spiro Sovereign Strategy, thinks there are reasons to be nervous about Spain’s ability to cut its debt. He said the government’s ‘ambitious plan’ to cut its budget deficit to 3% of GDP by 2013 and to restructure its regional banks could be hindered by the decentralised nature of politics in Spain.

Several regions, notably Catalonia and the Basque Country have regulatory, tax and spending powers, he said He points out many regions have also racked up huge debts and missed their budget targets even during the boom years, adding to the risk that they will not meet new targets in the years ahead.

Is that why Spain is under pressure?

No. Most people don't share Spiro's concerns and remain confident about the outlook for Spain’s finances. What has been key though in the current phase of the European debt crisis has been whether investors believe governments will be able to access affordable funding as their loans fall due over the coming years and allow them to stick to their debt cutting plans. Spain’s borrowing costs have been soaring in recent weeks with the yield (or interest rate) on a benchmark ten year bond up nearly 40% to 5.5% from 3.98% back in the middle of October.

The fact that Ireland is being charged 5.8% for the €85 billion it needs to borrow also has investors worried that if Spain has to take a handout it would add to Spain’s costs and call into doubt its current plans. The insipid demand for an Italian government bond auction on Monday added to these fears ahead of Spain’s bond sale on Thursday, especially amid growing fears the EU's emergency fund would not be large enough to bail out Spain.

Spain has to refinance nearly €300 billion of debt over the next couple of years. If it had to do so at current rates that would significantly add to its outgoings. The cost of insuring loans to Spain soared to a record high of 3.5% on Monday, meaning investors wanting insurance on the money they have loaned to Spain has to pay £220,000 for cover on a £6.5 million loan. Gary Jenkins, fixed income strategist at Evolution, said: ‘In a market where very few are willing to write protection on peripheral euro area sovereign debt, investors have few options but to reduce their exposure to the riskier sovereigns.’

But why does that mean Spain needs a bailout ?

Stephen Lewis, economist at Monument Securities, said Europe’s leaders have misunderstood the sentiment in the market and how quickly the mood can change. As they did with Ireland, it seems some of Europe’s leaders believe that if they are able to agree a support package for Portugal quickly, they will prevent the market contagion spreading to Spain. But what Ireland shows is that as soon as one deal looks likely, investors begin to wonder who will be next, he pointed out.

‘If a third member was rescued without fuss, it would heighten the market’s sense that bail-outs had become commonplace and that, maybe, several more support packages might be in the offing,’ said Lewis. Once that happens it becomes a self-fulfilling prophecy as rising costs mean that a government needs to do something to stop the rot. That is what happened in Ireland – a country many thought had done what was needed to avoid a bailout until a couple of weeks ago.

What does all this mean for me ?

Most people agree that the EU's failure to understand what they have to do to stop the contagion spreading means that the euro will be under pressure until they sort out the high levels of government debt once and for all. Kathleen Brooks, currency strategist at Forex.com, said: ‘The markets are likely to remain jittery while Europe works out its problems, and the euro may continue its grind lower into year-end.’

It also means that growth across Europe could be more subdued in the years ahead as higher borrowing costs will mean an even greater focus on cutting debt rather than growing, making it more difficult for the UK to continue to grow its exports to its largest trading partner. With the FTSE 100 down more than 3% since fears about European government debt re-emerged in the middle of October Joshua Raymond, market strategist at spread betting firm City Index, said the next few days will ‘be crucial in determining how stock markets finish the year.’

He said if investors don't start buying at current levels as they have done in recent pullbacks that could call into doubt a hoped-for end of year 'Santa rally

source : citynews, reuters, indiatimes

November 29th 2010

Bank of Spain urges lenders to fully disclose their exposure to the property market

(Reuters) The Bank of Spain called on the country’s banks to make an “extra effort” to disclose their real estate holdings amid concern the country may also need to be bailed out after Ireland accepted a financial rescue.

Lenders will have to give more information about risks linked to property and real estate, with details of guarantees and reserves set aside to cover them, by March 2011, Deputy Governor Javier Ariztegui said today in a speech in Barcelona. He also told banks to cut their costs in a “rapid and decided manner” and complete the mergers that will reduce the number of savings-bank groups by almost two-thirds.

“Spain and the Spanish banking system need our creditors to renew the financing they’ve granted us,” he said, saying there was “no room” for delaying the restructuring under way in the industry. “The best way to achieve it is to show daily that the banks and savings banks are healthy and profitable.”

Contagion from Europe’s sovereign debt crisis is spreading to Spain and Portugal as Irish officials race to complete a deal for an international aid package before financial markets reopen next week. All of Ireland’s banks passed European regulators’ stress tests in July, while five Spanish savings banks failed the exercise.

Stock prices are falling and financing costs soaring for Spanish lenders. Banco Santander SA, Spain’s biggest bank, dropped 3.6 percent to 7.54 euros at 11:57 a.m. in Madrid, while Banco Espirito Santo SA, Portugal’s biggest publicly traded bank by market value, fell 1.1 percent to 2.97 euros.

Wholesale Funding

Ariztegui said stress tests on Spanish banks published in July still “describe adequately the current situation of the banking system and its risks.” As well as the additional information, they will be required to publish on their real estate holdings, banks will also have to give a report on the state of their wholesale funding, he said.

Spanish lenders have 181 billion euros ($240 billion) of “troubled exposure” to construction and real estate, according to the Bank of Spain.

The comments were made in the text of a speech given by Ariztegui today in Barcelona that was published on the Bank of Spain’s website.

November 24rd 2010

Spanish central bank chief Miguel Ordonez warns of contagion risks

Spanish bond yields jumped on Tuesday, reflecting fears of contagion from the Irish debt crisis, while the central bank warned that the path to recovery would be slow and strewn with risks.

Spanish central bank chief warns of risks

Bank of Spain Governor Miguel Angel Fernandez Ordonez: 'The outlook for a gradual recovery is surrounded by uncertainties.'

The country's borrowing costs have soared this year as investors worry that its high deficit - the hangover of a property crisis that has yet to fully unwind - could push it the way of the Greek and Irish debt crises, putting a huge strain on the EU's bailout resources.

"The outlook for a gradual recovery is surrounded by uncertainties," Bank of Spain Governor Miguel Angel Fernandez Ordonez told senators.

"In an environment where financing conditions will foreseeably remain restrictive and in which the public and the private sector have a pressing need to clean up their financial position, we can expect the pace of recovery in household consumption to slow versus the first half of the year," he said.

November 23rd 2010

Spain is too big to be bailed out

Ted Scott, director of UK strategy at F&C Investments, believes that if investors continue to be nervous about Spain's ability to manage its debts that could pose a serious threat to the European Union.

'If Spain failed, it would be too large for the eurozone institutions to rescue and could bring the edifice of the euro project down with it,' warned Scott.

While the main focus in recent days has been on Ireland and Portugal, investors have become increasingly worried about what would happen if the market's attention switched to Spain's financial problems.

Spain’s economy is bigger than Greece, Ireland and Portugal combined and represents about 11.5% of the euro area’s GDP (gross domestic product), according to Scott.

He estimates there is around €460 billion (£390 billion) of bank assets tied up in Spain. Shoring up the banking system by giving financial aid to Spain on top of the €80-90 billion loan currently being negotiated with Ireland and a separate bailout of Portugal would exhaust the €440 billion European Financial Stabilisation Facility set up in the wake of the Greek crisis earlier this year.

The interest rates investors are demanding to lend money to both Portugal and Spain have leapt in recent weeks amid growing fear that these countries will not be able to stick to planned debt reduction targets and may need international aid.

Scott points out the Iberian governments have also had to pay more to attract would-be investors in recent bond auctions. While most commentators now believe it is just a matter of time before Portugal takes a handout, Scott like others is concerned it won’t be long before market fears turn to Spain, which moist agree would really test the desire of European nations to stay in the EU.

'While the market could cope with another bailout to Portugal, because of its negligible size compared to the total eurozone, Spain is the elephant in the room that the market fears,' Scott said. He said the European Union needs to pre-empt this possibility by taking decisive action soon.

November 21st 2010

Ireland Takes The Money

The Republic of Ireland has formally requested a three-year loan to prop up its flagging banking sector from the European Union and International Monetary Fund. The exact size and terms of the loan is to be determined in the coming days but will include the restructuring of the nation's banking sector.

The decision follows ever more frantic talks which have intensified since it became clear the extent to which the banking sector, including major institutions like Anglo Irish, have seen withdrawals from their depositors in recent weeks.

As the cost of Irish government debt has soared in recent weeks - and international institutions have become increasingly reluctant to accept the debt as collateral - Irish banking institutions have found themselves unable to find conventional funding. They have instead become reliant on temporary support from the European Central Bank and Irish Central Bank.

The government will borrow the money at a rate significantly below that which Irish debt has traded at in recent days. European Union sources were swift to brief that it would look 'favourably' on a plea for a loan. In reality it will want to move quickly to reassure markets that the finance can be counted upon immediately should Ireland want to begin drawing down the loan facility. The money will come from the European Financial Stability Facility. The €750 billion facility has already been tapped for some €110 billion by Greece - though the money has not yet been drawn upon. The size of Ireland's loan is estimated by analysts at being around €80 billion.

Ireland has fought hard to agree the terms of the current bail-out, in particular pushing aggressively against German proposals to push up Ireland's highly competitive corporation tax. Announcing the move Cowen said corporation tax would not change.

As bail-out details were being finalised the Irish cabinet met to agree even more draconian fiscal cuts. It is seeking to mount cuts which in aggregate amount to 10% of economic output over the next four years.

Cowen said: 'I want to assure the Irish people that we have a better future before us and we continue to act together in the national interest.'

The UK has decided to assist in the bail-out despite it coming primarily from the Eurozone region. Ireland is the UK's largest trading partner. The exact figure on offer from the UK has not been disclosed but Cowen referred to the bi-lateral offer indicating it could well form part of the overall paction.

It was thought crucial that the deal be done before international markets opened for business on Monday. However, it remains to be seen whether money markets will interpret it as a positive move. Key indicators which investors will focus on look set to include Portuguese, Italian and Spanish government bond yields. Those are the nations most vulnerable to renewed pressure from bond investors.

source : citywire

November 14th 2010

Plans for new Marina Development in Marbella

Sheikh Abdullah Bin Nasser Al Thani has recently revealed potential plans for a new development in Marbella Bajadilla marina, to rival local competition. The new owner of Malaga FC has suggested the project would require an investment of 70 million euros, which would cover the expansion of the marina via 400 additional moorings.

Local press reports have mentioned that the Sheikh originally wanted to purchase Puerto Banus, but the deal fell through due to lack of expansion potential. There has been increasing Arab interest in the Costa Del Sol, due to it's long term investment potential.

The investment project has been presented to the President of the Andalucian government, Jose Antonio Grinan.

November 10th 2010

Spain's economy stalls in third quarter; 0.2 per cent annual rise

Madrid - Spain's economy stalled in the third quarter, but did show a slight annual rise, the Bank of Spain said Friday, pointing to austerity steps and to economic uncertainty as factors. The country's gross domestic product (GDP) did not change from the previous quarter. However, it grew 0.2 per cent year-on-year, the central bank said.

Households had made many of their major purchases in the previous quarter, aware that value-added tax would go up after that, the Bank of Spain said. The tax hike forms part of austerity measures adopted by Prime Minister Jose Luis Rodriguez Zapatero's government, which is trying to slash Spain's budget deficit of 11.2 per cent.

Investments were also lagging because of general concern over the state of Spain's economy, and because of difficulties in obtaining credit, the central bank explained.

Spain emerged from recession in the first quarter. However, its unemployment of about 20 per cent remains the highest in the European Union, and growth is expected to remain slow for years to come.

November 3rd 2010

Spanish Consumer Confidence Drops Sharply

(RTTNews) - Spanish consumer confidence dropped sharply in October, as households' assessment on current economic situation and expectations deteriorated. According to survey data released by the Instituto de Crédito Oficial on Wednesday, the consumer confidence indicator logged 67.1, down from 72.8 in September. That was the second consecutive fall in the index.

A breakdown of data showed that a measure of consumers' view on the current situation in the Spanish economy slipped to 44.4 in October from 50.9 in September. The think tank said a downtrend observed in households' view on the Spanish economy, employment situation and households economy in the past six months led to a decline in the current economic indicator. Moreover, households' economic expectations for the next six months diminished, with the indicator falling to 89.8 from 94.7. Consumers were less optimistic about the Spanish economic developments in the coming months. They were also increasingly pessimistic about future employment and household economic situation.

"Households expressed notably greater pessimism about future economic and employment prospects, with consumers expecting the very fragile economic recovery to falter in the face of looming tough fiscal austerity measures and a renewed rise in unemployment in the latter months of 2010," IHS Global Insight economist Raj Badiani said. "We believe consumer spending will be under significant pressure in late-2010 and most of 2011."

Unemployment in Spain increased for a third month in a row in October, taking the total number of unemployed to 4.09 million, the Labor Ministry said Wednesday. The number of unemployed recorded a 1.7% month-on-month increase from September's 4.02 million. Unemployment increased by 68,213 persons from the previous month, while economists had forecast an increase of 82,800. In September, there was a monthly increase of 1.21% in the number of job seekers.

November 1st 2010

Jobless rate falls for first time in 3 years

MADRID (AP) -- Official figures show Spain's unemployment rate fell slightly to 19.8 percent in the third quarter, the first such decline in more than three years. The figure given by the National Statistics Institute on Friday compares to a joblessness rate of 20.1 percent in the previous three-month period of 2010.

The decline is a small measure of good news for a country struggling to recover from nearly two years of recession after the collapse of a real estate bubble that had largely fueled years of often solid economic growth. The institute said the rate fell because the work force remained stable while the number of people working increased by about about 70,000. The last time Spain's unemployment fell was in the second quarter of 2007.

World Statistics Day - A day in figures by INE Spain

7th October 2010

Over four mn unemployed in Spain

Madrid, Oct 5 (IANS) The number of unemployed people in Spain reached over four million this September, the labour and immigration ministry said.

In September, there were 48,102 more “newly unemployed” compared to August, out of a total of 4.17 million, Prensa Latina reported citing a ministry statement. The number of jobless who registered with the state rose in one year to 308,316, an 8.3 percent year-on-year increase.

The Spanish economy is beginning to show some signs of improvement, but a prolonged period of sustained growth is needed to be able to appreciate a recovery in job generation, according to Maravillas Rojo, the general secretary of employment.

4th October 2010

Spain registers the highest inflation rate in the past 2 years

Higher energy prices raised Spain's 12-month inflation to the highest level for nearly two years in September, official statistics showed.

Prices rose by 2.0 percent over the 12 months to September after a 1.8-percent increase in August, according to preliminary figures from the National Statistics Institute.

It was the highest inflation rate since November 2008 when Spain slumped into a deep recession, which dampened consumer demand and led to a decline in prices.

The statistics institute did not give a full breakdown of the figures for September but said oil and fuel prices rose slightly. Oil prices have been pushing up the inflation rate since the end of 2009. Final figures for inflation in September will be published by the institute on October 14.

(Telegraph) Air travellers were worst hit by the strike, with an estimated two-thirds of all flights to and from Spanish airports disrupted. British holidaymakers were among those stranded at airports across mainland Spain and the islands of Majorca, Ibiza and the Canary Islands.

Travellers have been forced to camp at airports until normal services resume when strike action ends at midnight tonight. Ryanair cancelled all its internal flights and most of its international flights, while Easyjet grounded half of its flights through Spain. British Airways and Iberia warned of delays and said flights were likely to be cancelled at short notice. An estimated 30 per cent of flights only were expected to operate.

Bus and train services were drastically reduced in Spain's main cities as protesters targeted transport hubs to complain at cuts in public sector pay and labour reforms that have made it cheaper and easier to dismiss workers. Taxi drivers went on strike across the country, with 90 per cent observing the stoppage in Barcelona alone.

Picketers blockaded wholesale markets in Madrid, Barcelona and other regional capitals in the early hours of Wednesday, and threw eggs and vegetables at lorries attempting to deliver produce. Shops on Madrid's main commercial thoroughfare the Gran Via were forced to close their shutters after protesters staged a march up the street at midday chanting "strike, strike".

Scuffles broke out between police and strikers at factory gates across Spain with reports suggesting that at least 15 people were injured nationwide. Major demonstrations had been called outside banks and government offices in cities throughout the day with the biggest expected in downtown Madrid at 6.30pm. Spanish unions said 10 million people, or more than half the workforce, had joined the action and claimed the first general strike in eight years was an "unquestionable success".

But the government played down the stoppage with Labour Minister, Celestino Corbacho claiming that for the most part "Spain was operating normally".

The action marks the bitter split between Spain's two most powerful unions the UGT (Unión General de Trabajadores) and the CCOO (Comisiones Obreras), and the Socialist Government, who are normally natural political allies. The government of Jose Luis Rodriguez Zapatero introduced severe austerity measures including the unpopular labour-market overhaul in a bid to bring down the budget deficit from 11 per cent last year to within the 3 per cent of GDP limit set by the European Union by 2013.

30th September 2010

Final Rating Agency, Moody, cuts Spain's Debt rating from AAA to Aa1

MADRID (AP)– Spain's hurting economy got hit again Thursday with yet another downgrade of its government debt by a major ratings agency, meaning the nation's borrowing costs will likely rise as it struggles to cut its deficit amid gloomy economic recovery prospects.

Moody's Investors Service lowered the rating from Aaa to Aa1, with a stable outlook, and the announcement dragged down stock prices from Asia to Europe.

The downgrade came a day after tens of thousands of Spanish workers staged a national protest against government austerity policies, clashing with authorities, canceling international and domestic flights and disrupting public transportation in the largest cities. Spain is struggling to emerge from a two-year recession after its construction and real estate sector collapsed, putting an end to a decade-long boom. Experts regard the country as one of the eurozone's most fiscally troubled members, along with Greece, Ireland and Portugal.

Unemployment stands at 20 percent, many businesses are struggling to survive and the London-based Moody's painted a grim picture of the nation's immediate economic future. "One of the key drivers for Moody's decision to downgrade Spain's rating to Aa1 is its weak growth prospects and the challenge that this presents for fiscal consolidation," said Kathrin Muehlbronner, a Moody's vice president and lead analyst for Spain.

Spain's economy will likely expand about 1 percent annually in coming years, lagging behind growth rates for nations like Britain, France and Germany, she said. The country also faces key challenges in trying to boost low productivity and international competitiveness, Moody's said.

The other two major rating agencies, Standard & Poor's and Fitch, downgraded Spanish debt in late April and late May respectively.

Moody's also said Spain faces worsening debt affordability, or interest payments as a share of revenues, and significant borrowing requirements — making it vulnerable to market volatility. Spain's Socialist government has enacted changes that make it easier and cheaper for companies to lay people off, and recent signs of wage restraint in the private and public sectors are positive signs, Moody's said.

But Moody's noted that the cost of letting workers go is still higher that the European Union average. Alejandro Varela, an analyst at Renta4 brokerage fund managers in Madrid, said investors were expecting the decision and that it will add pressure on the government to retool Spain's economy. "Moody's couldn't maintain the triple A rating with the Spanish economy in the situation it's in. It doesn't make sense," Varela said.

27th September 2010

Spain unveils ‘austere’ 2011 budget

The Spanish finance minister, Elena Salgado, unveiled what she described as an austere 2011 budget that will increase income tax for the rich and cut ministerial expenditure by an “extraordinarily large” 16 per cent.

Spain’s Socialist government says it is determined to stick to its deficit reduction plans. Ministers want to distinguish their country from more vulnerable economies such as Greece, Ireland and Portugal on the periphery of the eurozone.

“This is the most austere budget of recent years,” Ms Salgado said on Friday, after the cabinet approved the budget proposals to be presented to parliament in further detail next week.

Ms Salgado announced a rise in the top marginal rate of personal income tax, currently 43 per cent. That will increase by one percentage point for annual incomes over €120,000 ($162,000) and by two points for those above €175,000. The cabinet also abolished a special capital gains tax exemption for “Sicavs”, the investment funds used by wealthy Spanish families to manage their assets.

Such measures are unlikely to raise large sums of money – Ms Salgado estimated the extra revenue from the income tax rises at €170m-€200m – but are designed to appeal to left-wing Spaniards disenchanted with the government of José Luis Rodríguez Zapatero, the prime minister. Trade unions have called a general strike for Wednesday to protest against austerity.

Although Spain has stuck to its deficit targets and been rewarded by the bond markets with lower borrowing rates, economists and investors regard the official forecasts for economic growth – including a prediction of 1.3 per cent growth next year – as over-optimistic. They say a growth shortfall could threaten revenues and thereby undermine the credibility of the budget.

“It’s too early to declare victory,” said Emilio Ontiveros, chairman of Analistas Financieros Internacionales, a research group. “The markets are very worried about the political capacity of governments to clean up the public finances, and there is concern about the ability of the Spanish economy to grow and create revenues.”

Ms Salgado announced a small downward revision of the 2009 budget deficit, putting it at 11.1 per cent instead of 11.2 per cent of gross domestic product, and said everything would be subordinated to Spain’s promise to cut its deficit to 9.3 per cent of GDP this year and 6 per cent in 2011.

27th September 2010

Spanish general strike set to disrupt flights

A general strike in Spain is likely to cause travel disruption to and from the country this week.

Spanish trade unions are to stage protests against the government’s austerity cuts and labour reforms on Wednesday. They are reported to have agreed with the government to provide a minimum of between 20% and 40% of international flights.

The protest will leave at least 20% of European flights and 40% of other international flights unaffected. At least one quarter of train services would run, rising to 30% at rush hour. Under Spanish law, workers in certain sectors must provide a minimum level of services and the unions must agree with the government on what minimum levels should be.

The scale of transport stoppages is likely to be a key factor in the level of disruption caused by the strike as they determine how many non-strikers can get to their place of work.

Significant disruption in large cities is expected.

16th September 2010

Bund futures mark session low after strong Spanish auction

LONDON, Sept 16 (Reuters) - German government bond futures marked a session low on Thursday in the wake of a very strong Spanish bond sale which faded the allure of safe haven trades. The December Bund future FGBLc1 was down 49 ticks at a session low of 129.62 by 0854 GMT. Before the sale of 3.99 billion euros of 10- and 30-year Spanish Bonds the Bund contract was at 129.81.

"These were very strong results for Spanish supply. And all the more so given that both bonds performed strongly into the auction too. They helped to reduce interest in safe haven Bunds," Huw Worthington, a bond strategist at Barclays Capital in London said.

13th September 2010

Spanish Lawmakers Give Final Approval to Labour Overhaul

MADRID (Dow Jones)--Spanish lawmakers have given their final approval, without making major changes, to a long-awaited overhaul of labour laws expected to help cut unemployment and spur economic growth.

The parliamentary vote came at the end of a two-month period allowing lawmakers to make changes to legislation approved in June. The reform aims to encourage hiring by reducing the Spain's high cost of dismissal and giving companies more flexibility to reduce working hours and staff levels in economic downturns.

The legislation removes most restrictions on the use of indefinite contracts with unfair dismissal costs equal to 33 days of salary per year worked. The standard indefinite contract currently in use has a cost of dismissal equal to 45 days.

Furthermore, it makes it easier for workers to be dismissed on a "fair" basis, which has a 20-day cost of dismissal. The reform has come at high political cost for Socialist Prime Minister Jose Luis Rodriguez Zapatero who has seen his standing fall in opinion polls and who faces a general strike called by unions on Sep. 29.

Zapatero's government, however, has come under intense international pressure to take measures to reduce a double-digit budget deficit and spur economic growth.

Spain's 20% unemployment rate is twice the 10% average for the wider euro zone.

5th September 2010

Claims for unemployment benefits rise in August by about 61,000

Spain says claims for unemployment benefits rose in August by about 61,000, ending four months of decline as temporary summer work contracts began to expire.

The Labour Ministry said Thursday the number of people claiming benefits now stands at 3,969,661. The overall jobless rate stands at about 20 percent as Spain struggles to crawl out of nearly two years of recession.

Finance Minister Elena Salgado said Thursday's figure was "not bad" because claims traditionally rise in August as temporary workers in the tourism industry see their contracts run out. She noted that in 2007, when the economy was red hot, claims still rose by 58,000.

Over the past 12 months the number of people filing for benefits has risen 9.3 percent.

31st August 2010

Spain leads way in annual Eurozone construction output

Seasonally adjusted production in the construction sector increased by 2.7pc in the euro area and by 3.5pc in the wider European Union in June 2010, compared with the previous month, according to first estimates released today by Eurostat. In May 2010, production fell by 0.7pc and 0.1pc respectively. Compared with June 2009, output in the sector this June was up by 3.1pc in the euro area and by 5.4pc in the 27 country EU.

Monthly : Among the Member States for which details are available for June 2010, construction output rose in eight and fell in six. The highest increases were seen in Romania (16.5pc), Spain (7.2pc) and Poland (4.5pc), while the largest declines were in Hungary (-2.3pc), the Netherlands (-1.8pc) and Slovenia (-1.6pc). Figures are not yet available for Ireland.

Building construction gained 3.3pc in the euro area and 5.7pc in the EU27, after -0.3pc and -0.5pc respectively in May. Civil engineering increased by 1.2pc in the euro area and by 2.0pc in the EU27, after -2.9pc and -1.9pc respectively in the previous month.
Annual comparison

On an annual basis, construction output rose in five and fell in nine of the countries where information is available. The highest increases were registered in Spain (18.6pc), the United Kingdom (13.6pc) and Poland (10.2pc), while the largest decreases were experienced in Hungary (-19.6pc), Bulgaria (-17.5pc) and Slovenia (-16.9pc).

Building construction gained 6.4pc in the euro area and 7.5pc in the EU27, after -5.6pc and -2.3pc respectively in May. Civil engineering dropped by 6.7pc in the euro area and by 0.6pc in the EU27, after -9.2pc and -3.4pc respectively in the previous month.

25th August 2010

Spain's GDP up 0.2 pct in second quarter

Spain confirmed its slight recovery from recession on Thursday with 0.2 percent growth in the second quarter, final official data showed.

The figure, which confirmed provisional data issued by the National Statistics Institute (INE) on August 13, follows growth of 0.1 percent in the first quarter, when Spain emerged from recession.

On a year-on-year basis, Spanish Gross Domestic Product shrank 0.1 percent, a figure slightly better than the INE's provisional estimate of 0.2 percent. The second quarter upturn is substantially less than in Germany and France, where growth for the April-to-June period was 2.2 percent and 0.6 percent respectively.

Spain's government predicts the economy will contract 0.3 percent in 2010 and then expand 1.3 percent in 2011. Other organisations are far more pessimistic, raising doubts over the government's ability to rein in its massive public deficit.

The Bank of Spain expects a contraction of 0.4 percent this year before a return to growth of 0.8 percent next year while the International Monetary Fund has revised its 2011 growth forecast down from 0.9 percent to 0.6 percent.

Spain entered its worst recession in decades at the end of 2008 as the global financial meltdown compounded a crisis in the once-booming property market and then returned to growth in the first quarter of this year with a gain of just 0.1 percent. The INE on Wednesday said the economy contracted 3.7 percent in 2009, slightly more than its initial estimate of 3.6 percent issued in February.

25th August 2010

Spain's Economy Shrank 3.7% in 2009, More Than Initial Estimate

Aug. 25 (Bloomberg) -- Spain's economy contracted by more than initially estimated last year, the National Statistics Institute said.

Economic output declined 3.7 percent compared with an earlier assessment of 3.6 percent, the institute said in an e- mailed press release. Exports grew less than previously estimated, the release said.

INE said there was no revision to annual GDP data for 2006- 2008 after its review.

24th August 2010

Spain's caja overhaul will spark further bank mergers

The merger of two Galician cajas, Caixa Galicia and Caixanova, could create too strong a competitor for Pastor on its home turf and force it to seek partners. Spain's caja overhaul could spark further bank mergers

Spain's banking sector is headed for more consolidation as an overhaul of savings banks toughens competition, forcing smaller commercial banks into mergers to defend their flagging business and return to profitability. Smaller banks will also be seeking increased scale as they fight to regain access to money markets for funding, seen as crucial to unblocking seized-up domestic lending and help revive Spain's recession-hit economy.

Stress tests of the health of Europe's banks has boosted market confidence in Spain's top names Santander and BBVA, which have both successfully sold bonds, but many smaller players remain cut off from market funding.

"The new challenge for smaller commercial banks is how to defend their territory against some of the revamped cajas, many of which will be healthier and more aggressively competitive," said BPI bank analyst Carlos Peixoto.

Mid-sized listed bank Sabadell and smaller rival Guipuzcoano have pooled resources in a deal valued at some 730 million euros (600.8 million pounds). Pastor bank , from the region of Galicia, declined an invitation to join. But the merger of two Galician cajas, Caixa Galicia and Caixanova, could create too strong a competitor for Pastor on its home turf and force it to seek partners, Peixoto said.

In the past, the market was roughly divided up between the two top-tier banks, some small-to-mid-size banks and 45 cajas, which account for around 50 percent of the financial system. The cajas have an extensive branch network but got in over their heads through over-lending during a decade-long property boom. Through mergers and takeovers the savings banks branches have shrunk by about two-thirds at a cost of around 11.2 billion euros from the government-backed restructuring fund (FROB). Cajas that got public funding for mergers are expected to close between 10 percent and 30 percent of branches and cut staff by 11 percent to 27 percent.

"In the end, the consolidation is about dividing up a market between fewer, more efficient institutions to ensure a return to pre-financial crisis profitability," said Santiago Carbo Valverde, professor at the University of Granada.

One formidable new player on the scene is the tie-up between Caja Madrid, formerly Spain's second biggest savings bank, and six smaller regional cajas to create a deposit leader, ahead of Santander , BBVA and former top savings bank La Caixa, with a market share of around 12 percent.

CAJAS GO PRIVATE

Apart from downsizing and weeding out weaker players, the cajas shake-up also changed their legal status, which will be a catalyst for further consolidation. A law passed in July allows the cajas to offer up to 50 percent of capital to private investors, a move designed to curb powerful political influence over their boards and to bring them into line with listed rivals.

"There will be a second wave of mergers when the cajas open up to investors. Spanish as well as foreign banks can buy stakes, which was not allowed before," a banking source said. The law also allows the cajas to create a new bank to manage their banking business, separating this from their charitable works, or to become a foundation, transferring their retail banking activities to a new bank in which they hold a stake.

"Our estimate is that more than 80 percent of savings banks will opt to become banks. It's a no-brainer. They need to be able to raise capital," Carlos Trascasa, director and partner at McKinsey and Co. in Madrid said at a conference last month. This additional restructuring will ensure a return to "double digit" profits, he said.

FODDER FOR PREDATORS?

Last month, JC Flowers, a U.S. buyout fund specialising in distressed banks, agreed to subscribe to a convertible bond issue by Banca Civica, one of five Spanish cajas that failed the stress tests. This ground-breaking deal -- the first time a foreign institution has invested in a caja -- does not mean the savings banks will become merely fodder for speculators, analysts say. Spain's listed banks have been waiting in the wings to pick up cheap assets from the cajas, their long-time fierce competitors, particularly in the smaller regions.

"The leading banks are grabbing small and mid-sized firms' lending at fat margins as the loans roll off the cajas, which do not have the funding to hold on to them," a U.S. bank analyst said.

Last month, BBVA said it hopes to grab between 2 and 3 percentage points in market share from the cajas in two-three years. Mid-sized lender Popular has set up a new bank with France's Credit Mutuel-CIC to participate in the consolidation, focussing on cajas' branch networks or loan portfolios.

"A rough estimate could be around 300 million euros for a 300-branch network," the banking source said, although noted this depends on the size and location of the branches.

19th August 2010

Spain eases cuts on infrastructure budget

MADRID: Spain’s government said yesterday it will spend 500m more than planned on infrastructure projects but still maintain its goal of slashing the deficit to the eurozone limit by 2013. Transport and Development Minister Jose Blanco told a news conference the 500m will cover some 50 projects which were suspended due to austerity measures.

The socialist government in May introduced a 15-billion-euro austerity package to rein in the public deficit from a massive 11.2 percent of gross domestic product in 2009 to six percent in 2011 and three percent — the eurozone limit — by 2013. Blanco on July 22 announced a reduction in his ministry’s budget of ¤6.4bn for 2010 and 2011, leading to the suspension of 199 road and rail projects for one to
four years.

Unions protested, claiming that the cuts would lead to the loss of 100,000 jobs at a time when unemployment has soared to more than 20 percent. Finance Minister Elena Salgado told the news conference the new higher spending limit is the result of improved market conditions which has allowed the government to reduce its debt costs, and would not affect the deficit-reduction goals.

She also said the government has no plans to cut taxes to rein in the deficit.

“We believe that the current tax structure is adequate,” she said. Salgado said last week that the government planned to relaunch some suspended public works projects, but gave no details. Blanco said yesterday that the projects to be revived were those that were already in “an advanced state.”

He said one of these would be the completion of a motorway connecting Madrid and the northern coastal city of Santander. Spain slumped into its worst recession in decades at the end of 2008 as the global financial meltdown compounded a crisis in the once-booming property market.

18th August 2010

Spain debt auctions ease euro zone nerves

Spanish debt auctions attracted strong demand on Tuesday and allayed concerns about the pressure on costs of funding for euro zone countries saddled with high debt and poor growth.

MADRID (AP) — Spain has borrowed €5.5 billion ($7.05 billion) by selling 12- and 18-month bills at lower interest rates despite renewed market worries over the economy's recovery. The Finance Ministry said it sold €4.34 billion ($5.44 billion) in 12-month bills at a marginal rate of 1.89 percent, against 2.24 percent in the last sale in July.

It said €1.17 billion ($1.5 billion) was sold in 18-month bills at 2.15 percent, compared to 2.40 percent last month. It was the fourth consecutive bond sale at lower interest rates following months of increases amid fears Spain might need a bailout because of its swollen public deficit.

Madrid's stock market was up 0.8 percent after days of losses amid signs Spain's economy will take some time to emerge from nearly two years of recession.

17th August 2010

Santander renews merger talks with M&T Bank corp.

MADRID, Aug 17 (Reuters) - Spain's Santander has renewed talks to merge its U.S. operations with New York regional lender M&T Bank Corp, the Financial Times reported on Tuesday, as it resumes its pursuit of the American market.

Talks about merging Santander's Sovereign Bank into M&T stalled in May over who would control the enlarged business, sources told Reuters. However, the two banks have again started exploring a deal and have sounded out the views of regulators, including the Federal Reserve, the FT said, citing people familiar with the matter. Santander declined to comment.

The bank has made a string of purchases this year, including the buyout of its Mexican division and Royal Bank of Scotland's (RBS.L) UK branches, to bulk up its overseas markets and offset weak business in Spain after a severe recession. Santander's ambitions to expand its U.S. presence are no secret, and the bank wants to ensure control over the positions it acquires. It bought 25 percent of Sovereign in 2006 for $3.3 billion before buying the remainder of the troubled bank in early 2009.

"We don't believe the Spanish group to be willing to become a minority shareholder in the merged (M&T) entity," said BPI analysts in a note to clients.

"We'd attribute a higher probability of Santander launching a bid over M&T than losing control over its US operations," the analysts said.

Under the terms for the M&T deal discussed last spring, M&T would have acquired Sovereign in a stock-based transaction, creating a business with some $150 billion in assets and more than 1,500 branches in the north-east of the United States. Santander would have taken a stake in the combined entity and bought a 22.5 percent M&T stake held by Allied Irish Banks (ALBK.I), and may have injected cash in the enlarged bank, the FT said. AIB also declined to comment on the report.

By 1021 GMT, Santander's shares were up 1.0 percent at 9.54 euros, broadly in line with gains on the DJ Stoxx European bank index and the Madrid stock exchange.

14th August 2010

Spain's Economy Continues Weak Recovery

Spain's economy confirmed it is on the growth path after growing for the second straight quarter between April and June, figures showed on Friday. Statistical office INE said the economy grew 0.2% in the June quarter, a modest pick-up from the 0.1% expansion in the first three months of the year. Economists had predicted 0.3% growth.

Prior to the first quarter, the Spanish economy had contracted for six straight quarters as it endured its worst downturn in decades. A collapse in the construction sector sparked the country's recession. On a year-over-year basis, however, gross domestic product was still down 0.2%. Economists had forecast a 0.1% fall.

The growth suggests the government's recently unveiled budget cuts are yet to have an impact on growth. Spanish Prime Minister Jose Luis Rodriguez Zapatero has announced steep budget cuts aimed at bringing down the country's large budget deficit. Measures include public sector wage cuts and smaller budget allocations for regional governments. Spain currently has a deficit of 11.2% of GDP, which it has pledged to bring under 3% by 2013. And although Spain's government debt load is not as worrisome when compared to some of its European counterparts, the country's private sector shoulders a massive debt overhang.

The government's spending cuts have been met with stiff resistance from Spaniards, with numerous demonstrations and strikes staged by public sector workers. The Iberian nation has the highest unemployment rate in the euro area at 20.1%, with nearly half of under 25s without a job. Economists said growth in the June quarter was encouraging, but were still concerned that Spain could slip back into technical recession in the coming quarters. "The second quarter could be the last quarter for some time where the government is able to prop up effectively the struggling economy," said Raj Badiani at IHS Global Insight.

"The fiscal stance is set to become increasingly more restrictive, implying that the private economy will have to fend for itself. Apart from exports, I can't see where significant private sector growth will come from."

13th August 2010

Spain's air traffic controllers call off strike

Spanish air traffic controllers have called off a strike which would have wrecked the holiday plans of hundreds of thousands of Britons. The USCA union said it will not strike this month because of the disruption it would cause holidaymakers and the impact on the tourism industry, which accounts for 11 per cent of Spain’s economy.

Controllers had voted in favour of a three-day strike which was expected to take place towards the end of August. Britons will still be able to fly to popular Spanish holiday destinations such as the Costa del Sol after traffic controllers called off a strike

Britons will still be able to travel to popular Spanish holiday destinations such as the Costa del Sol after traffic controllers called off a strike Spokesman Cesar Cabo described the decision to cancel the strike as ‘an exercise in responsibility’. The union is still in talks with ANEA, the Spanish airports authority, which had made cancelling the strike a condition for continuing negotiations. Air traffic controllers in Spain earn an average of £167,000 a year but object to recent changes in their conditions.

In February the government slashed controllers’ salaries by around 40 per cent after it was revealed some were earning up to £800,000 a year. The average wage was reduced from £290,000 a year to £167,000. In the UK the same workers earn a basic salary of between £60,000 and £90,000 a year.

Spain is Britons’ most popular holiday destination, with 17million heading there each year.

13th August 2010

Spanish Inflation Jumps To 1.9%

(RTTNews) - Consumer prices in Spain increased 1.9% year-on-year in July after rising 1.5% in the previous month, the Madrid based National Statistics Institute said on Thursday. This was in line with expectations. Core consumer prices, which exclude food and energy items, were up 0.8%.

Region-wise, consumer prices recorded the biggest rise in Catalonia. Significant price rises were also witnessed in the Basque Country, the Canary Islands, Cantabria and Murcia.

On a monthly basis, consumer prices dropped 0.4% in July, also matching expectations. Meanwhile, the harmonized index of consumer prices increased by 1.9% on a yearly basis, but falling 0.4% on a monthly basis

11th August 2010

Prime Minister Says Spain May Reverse Infrastructure Spending Cuts

Aug. 10 (Bloomberg) -- Spanish Prime Minister Jose Luis Rodriguez Zapatero said the government plans to reverse some cuts to infrastructure spending after the country’s borrowing costs declined.

“We are working to be able to ease the cuts in infrastructure,” Zapatero told a news conference today on the Mediterranean island of Mallorca. The plan, which may be announced in the next 10 days to two weeks, will put back in place some projects that were suspended, he said.

“This will be possible if, as we understand, the current financial stability allows us some room in the 2011 budget,” Zapatero said.

The extra yield investors demand to hold Spanish debt rather than German equivalents has declined by about a third since a euro-era high in June. To bring down borrowing costs, the government has enacted the deepest austerity measures in at least three decades, including a reduction in public wages and a cut in investment of almost 6 billion euros ($7.9 billion) this year and next.

The austerity measures have hurt the shares of Spanish builders, with Sacyr Vallehermoso SA’s stock falling 46 percent since the start of the year. Madrid-based Actividades de Construccion y Servicios SA, Spain’s largest builder, generates 74 percent of sales in its home market, while smaller rival Fomento de Construcciones y Contratas SA gets around 56 percent of its sales in Spain.

The country’s budget deficit was the third-highest in the euro region last year at 11.2 percent of gross domestic product and the government plans to reduce it to 6 percent next year. The spread on Spanish 10-year bonds was 153 basis points today, down from a closing high of 221 basis points on June 16.

9th August 2010

Spain's economy faces new downturn this year

The Spanish economy could contract by up to 0.6 percent this year as the government's tough austerity measures begin to bite, a study by the BBVA bank said on Monday.

"The Spanish economy continues to recover, albeit at a slow pace, but may yet be affected by ongoing uncertainties," it said.

Spain entered its worst recession in decades during the second half of 2008 as the global financial meltdown compounded a crisis in the once-booming property market. It emerged during the first quarter of thus year with tepid growth of 0.1 percent.

The Bank of Spain on Friday forecast growth of 0.2 percent in the second quarter, while official figures from the National Statistics Institute are to be released on Friday. The central bank, along with the International Monetary Fund, predicts the economy will shrink by 0.4 percent in 2010, while the government puts the figure at 0.3 percent. But BBVA Research has a more pessimistic forecast, seeing a contraction of 0.6 percent this year, ahead of 0.7 percent growth in 2011.

"Given the weakness of the recovery in the first half of the year, we expect the Spanish economy to experience additional quarters of negative growth during the following quarters, possibly in the third quarter, although lower than those registered in 2008 and 2009," BBVA said.

"The factors behind this temporary correction setback in the economic uptrend derive mainly from the contractive effects of fiscal consolidation programmes being pushed through in Spain and Europe, and from the increased uncertainty on the international financial markets."

The government this year introduced tough austerity measures to rein in the public deficit from a massive 11.2 percent of gross domestic product in 2009 to six percent in 2011 and three percent -- the EU limit -- by 2013. The cutbacks include a freeze on pensions and a five-percent pay cut for civil servants. The government has also adopted an overhaul of the labour market that will make it easier and cheaper for employers to dismiss workers in an effort to fight an unemployment rate that has hit 20 percent, the highest in the eurozone

9th August 2010

Spain air traffic union to decide this week on strike

AFP - The union representing Spain's air traffic controllers will meet on Thursday to decide whether to go ahead with a strike over working conditions, a union member said. This means any walkout, which could disrupt flights at the peak of the tourist season, would not take place until at least August 22 as the union must give a formal 10-day warning of strike action.

Spanish air traffic controllers voted by an overwhelming majority on Tuesday to strike over government changes to their working hours that reduce overtime pay. On Friday they broke off negotiations with the state-run airport management authority, AENA.

"On Thursday will have a meeting of our executive committee which will take some decisions," a source at the Union of Air Traffic Controllers (USCA) said on Sunday.

"We still hope that it will not be necessary to call a strike and we can reach an agreement with" AENA.

Transport Minister Jose Blanco warned Sunday of "serious damage to the economy and tourism of our country" if the strike goes ahead. Exceltur, an association that represents more than 20 major travel industry groups in Spain, also warned it may take legal action against the controllers if they proceed with the walkout. It urged them to accept AENA's offer of arbitration to resolve the dispute. The controllers are angry over a government decree on working conditions announced last month which would reduce rest periods and cut generous overtime benefits.

The government has called the "millionaire salaries" enjoyed by the controllers "incomprehensible privileges" at a time of austerity to slash Spain's public deficit, the eurozone's third-highest after Greece and Ireland. It introduced tough austerity measures this year to rein in a public deficit that hit 11.2 percent of gross domestic product in 2009 as the country emerges from a recession that began in late 2008

8th August 2010

Spain second-quarter GDP grew 0.2%: Bank of Spain

LONDON (MarketWatch) -- Spanish gross domestic product grew at a slightly faster pace in the second quarter, expanding by 0.2% compared to the first three months of 2010, the Bank of Spain said in its monthly economic bulletin, according to news reports. Compared to the second quarter of last year, GDP fell by 0.2%. Spanish GDP grew by 0.1% in the first quarter. Official government data is set for release on Aug. 13. The same day, the European Union statistics agency, Eurostat, will provide its first estimate of euro-zone second-quarter gross domestic product.

QUARTERLY REPORT ON THE SPANISH ECONOMY (click here)

5th August 2010

Spain output grows for fourth month in June

MADRID, Aug 5 (Reuters) - Spanish industrial production rose 3.0 percent year-on-year in June, beating forecasts for a rise of 2.4 percent, and adding to expectations that the economy grew again in the second quarter. Output grew for the fourth month running in calendar-adjusted terms and was only just behind a slightly revised 3.2 percent expansion in May, data from the National Statistics Institute showed.

The rise was largely the result of a jump of 5.4 percent in consumer durable goods, the first rise in that sub-index since October 2007, and came before a 2 percentage point increase in VAT which came into effect from July. Economists believe the Spanish economy grew again, albeit weakly, in the second quarter but they remain worried that the economy will slip back into recession when budget cuts take effect later this year.

'On a month-on-month basis the data were pretty flat. Spain is going to need the external sector if it is going to expand going forward and it doesn't look like happening and is one reason why it could head back into recession later this year,' said Ben May, economist at Capital Economics.

A Reuters poll on Wednesday forecast the economy grew 0.2 percent from March-June. The data also showed strong rises in energy related production, up 4.2 percent after 1.5 percent in May. Consumer goods also rose by 2.2 percent, up from 1.6 percent the previous month. Output fell by as much as a fifth in some months last year as the economy contracted sharply following 2008's financial crisis.

4th August 2010

Spain services growth weakens in July

MADRID, Aug 4 (Reuters) - Spain's services sector expanded at its slowest pace for three months in July, dampening hopes of an upsurge in growth as companies continued to lay off staff and cut prices in response to subdued demand, a survey showed on Wednesday.

Markit's Purchasing Managers Index of companies ranging from banks to hotels fell in July to 51.3 from 51.8 a month earlier, the second straight month of declines but still above the 50 mark that divides growth from contraction. The new business segment returned to tentative growth after shrinking in June.

"July PMI data continue the recent trend that suggests a lack of momentum in the Spanish service sector, with the hoped-for recovery in the sector this year yet to fully establish itself," said economist at Markit, Andrew Harker. July's figure was just below estimates in a Reuters poll of 51.5. Spain's economy limped out of an 18-month recession in the first quarter but the euro zone debt crisis and wide-ranging austerity measures have dampened growth prospects and some observers are betting on a new dip before year-end.

According to the Markit poll, new business began to grow again in July after contracting in June, rising to 50.4 from 47.5, reflecting an improvement in demand though at a lower rate than seen during the previous phase of expansion from March to May. Employment in the service sector continued to suffer in July, with companies reporting layoffs for the 29th straight month. Unemployment rose slightly to over 20 percent in the second quarter, marking 12 straight quarters of rising joblessness, according to data by the National Statistics Institute.

"Weak consumer demand pervades the economy and continues to lead to job cuts and heavy price discounting," Harker said.

Output prices continued a two-year period of falls, dropping at the fastest rate since March, with those surveyed saying prices were cut in response to pressure from both clients and competitors. Greater price competition helped cancel out the effect of a 2 percentage point increase in value-added tax introduced on July 1 by a government looking for new ways to rein in a huge public deficit.

Costs increased, though at a slower pace than average, with some polled blaming the VAT hike and others pointing to higher fuel prices. Despite the relatively subdued business conditions, Markit found providers remained optimistic on future activity. Positive sentiment had been reported for 14 straight months, reflecting hopes the wider economy would improve, strengthening demand.

1st August 2010

IMF lowers Spain growth forecast, warns of 'fragile' rebound

(AFP) The IMF on Friday lowered its 2011 growth forecast for the Spanish economy to 0.6 percent from the 0.9 percent it foresaw in April and warned the recovery "is likely to be weak and fragile."

"The particular challenges facing Spain will likely make the recovery slower and more fragile than in the euro area," the IMF said in its latest report on the country's economy. The International Monetary Fund's growth forecast for Europe's fifth-largest economy for next year was lower than the 1.3 percent expansion predicted by the Spanish government, which is under pressure to close its public deficit.

The IMF listed a deflating property bubble, a "dysfunctional" labor market, heavy private sector indebtedness, weak competitiveness, "anemic" productivity growth and a "banking sector with pockets of weakness" as the challenges faced by the Spanish economy. "Not only does each factor pose a challenge by itself, but, together, they may create a vicious cycle of negative feedback," the IMF said in the report. "The central scenario is one of a long and gradual adjustment of the various imbalances in the economy."

Spain scraped out of recession during the first quarter when it expanded by 0.1 percent from the previous quarter and the government expects it will expand by 0.3 percent this year. The IMF predicts the Spanish economy will contract by 0.4 percent this year. It forecasts growth of 1.7 percent in 2012 and of 1.9 percent in both 2013 and 2014 and of 1.8 percent in 2015. Spain was the last major world economy to emerge from recession and concern over its weak growth prospects has fueled market worries that it may struggle to rein in a public deficit that shot up to 11.2 percent of GDP last year, the third highest level in the eurozone after Greece and Ireland.

The country entered its worst recession in decades during the second half of 2008 as the global financial meltdown compounded a crisis in the Spanish property market, which had been a major driver for growth in previous years. "What needs to happen now is that the economy as a whole has to move away from its past reliance on the housing sector and produce more tradable goods," said IMF mission chief for Spain, James Daniel. "Together with concerted and continued progress on structural reforms, especially in the labor market, we see no reason why Spain should not be able to return to good levels of growth in the medium term."

The government has introduced the steepest spending cuts since Spain returned to democracy following the death of conservative dictator General Francisco Franco in 1975 in an effort to slash the public deficit. The cutbacks include a freeze on pensions and a five-percent pay cut for civil servants. The government has also adopted an overhaul of the labour market that will make it easier and cheaper for employers to dismiss workers in an effort to fight an unemployment rate that has hit 20 percent.

Socialist Prime Minister Jose Luis Rodriguez Zapatero has also announced plans to raise the country's retirement age to 67 from 65. Daniel said if the austerity measures are complemented by a reform of the pension system, "this will put Spain's public finances on a sustainable path."

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Savings Bank Rules, Bond Auctions, Inflation Rate, EU Stress Tests, Soverign Credit Ratings, World Cup, Job Figures, Industrial Output, Labour Reform, House Prices, IMF Reports, Banco Santander

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