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08 June 2012

Miguel Fernández Ordóñez: Presentation of the 2011 Annual Report


The governor of the Bank of Spain acknowledged that the presentation of the Annual Report is taking place in an extremely difficult setting for Europe in general, and for Spain in particular, marked by the acute euro area sovereign debt crisis and the double-dip recession in the Spanish economy.

Two main factors lay behind the crisis. First, the insufficient adaptation of domestic economic policies to the demands of monetary union membership, which translated into a build-up of major imbalances that placed some economies in a position of vulnerability. And second, the lack of political consensus at the European level to tackle the weaknesses of the euro’s institutional design, which largely explains the spread of the tensions to countries whose misalignments were on a lesser scale.

The three-pronged measures adopted – spanning domestic economic policies, European governance reform and, most notably, ECB action – proved essential in containing the heightening tensions, which might have led to a systemic crisis of unforeseeable consequences. That said, these measures were not a conclusive solution; they simply helped gain valuable time so that governments could continue moving to resolve the challenges outstanding, and so that the measures adopted might begin to bear fruit. To definitively resolve the European sovereign crisis will require major progress in various fields. In the short term, the ongoing reform of governance must be completed and put into practice, including the full start-up of the European Stability Mechanism. A suitable balance must also be struck between two complementary objectives: fiscal consolidation and economic growth. Here, the “fiscal package” agreed at the end of 2011 must be supplemented with a new “growth package”.

The challenges the Spanish economy faces are enormous. The latest episode of the sovereign debt crisis is severely impacting agents’ confidence and the economy’s financing conditions, placing it in a position of extreme vulnerability. Following two consecutive quarters of negative growth, our economy is once again in recession and the prospects of recovery are not immediate. Moreover, the prolonged cyclical weakness is preventing swifter headway in redressing public finances and in reducing private-sector debt, and casting doubt on the resilience of the financial system. That has triggered tensions on the debt markets and activated perverse feedback loops. Spain is in this situation despite the fact that its authorities have implemented far-reaching reforms in recent years to resolve the inefficiencies in its economic functioning, to correct the serious deterioration in public finances, and to redress and restructure the financial system, in order to restore financing flows.

The increased dependence on external financing in the pre-crisis period is the consequence of the sizeable accumulation of debt by households and firms, which also led to the Spanish banking system becoming oversized. The need to correct these imbalances poses an added difficulty to recovery in the economy, given that it restricts the headroom available to raise investment and consumption through resort to external financing.

There was significant progress in the clean-up and restructuring of the Spanish banking system. From the onset of the crisis to the beginning of this year, provisions of around 13 per cent of GDP were set aside, banks shored up their solvency by significantly increasing their capital, most savings banks converted into banks, and around 30 institutions disappeared, with their management passing in most cases to other sounder and more efficient banks.

Full speech



© BIS - Bank for International Settlements


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