Small steps down the road to recovery

The Spanish economy is staging a cautious recovery, but the electorate may still have to choose between continued fi scal austerity and a debt restructuring.

The good news is that the Spanish economy saw better-than-expected growth in the first quarter of this year, followed by a moderately successful
bond auction. With the threat of a further crisis looming over the Eurozone’s economies, analysts have drawn some comfort from signs that Spain may yet avoid the fate of Greece, Ireland and Portugal.

Its economy grew 0.8% – the strongest rate since Q2 2008, boosted by strong exports. GDP was up by 0.3% from the previous quarter, slightly above the Spanish central bank’s 0.2% forecast. The improvement showed that the Spanish economy remained on a path of gradual recovery, the National Statistics Institute says.

Spain then sold €3.2bn of 10-year and 30-year bonds, somewhat less than the Treasury’s €4bn target.

Analysts believed the bonds were sold at a reasonable yield, with demand exceeding the amount sold. The results encouraged the belief that contagion from the eurozone sovereign-debt crisis may have been contained.

No Need for rescue

“For the time being, Spain does not need to be rescued because it is not insolvent,” says Stuart Thomson, chief economist at Ignis.

But there is a caveat. The country may have other problems, Thomson says.

“We do not believe that Spain can grow its way out of its current debt problems. Higher inflation is not an option, and therefore we believe that the next global downturn will force the electorate to choose between continued fiscal austerity and negligible growth or seeking relief through debt restructuring.”

Spain’s government debt is relatively modest at 70% of GDP, although this does not reflect the substantial debt held by regional governments. The hidden public sector debt is unlikely to exceed 20% of GDP, leaving the overall public sector burden at 85%-90%, which is in line with other leading industrialised economies, Thomson says.

The biggest problems arise from the private sector, where debt could be as high as 150% of GDP. As property prices, which trebled during the bubble, have fallen by only 13%, the real property losses are likely to be much greater than currently implied on banks’ balance sheets, particularly for the cajas (savings banks), he adds.

Spanish banks still carry a large volume of property on their balance sheets, much of which was bought near the housing market’s peak. The banks currently own nearly 20% of the country’s estimated one million
empty homes.

The combination of a housing market collapse and the global financial crisis had a serious impact on Spain’s fund management industry.

“For Spain, the impact [of the financial crisis] was important, with a significant reduction in assets under management that declined from €238.7bn at the end of 2007, to €138.1bn at the end of 2010,” says Paloma Piqueras, head of BBVA Asset Management for Europe.

A number of reasons explain the current Spanish fund industry’s situation: the economic crisis, a decline in savings and a loss of confidence by investors.

Another important factor in 2010 was the banks’ growing need for funds. “Some banks and cajas increasingly needed to strengthen their balance sheets, generating a battle for deposits with highly
remunerated offers to attract clients,” Piqueras adds.

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