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16 December 2013

Statements by EC/ECB and IMF following conclusion of fifth review of financial assistance programme for Spain


The positive assessment of steadfast programme implementation that formed the basis of the Eurogroup statement of 14 November has been maintained through the final review. The programme ends on 23 January, 2014. (Includes link to ECFIN country focus report.)

EC/ECB

A delegation from the European Commission, in liaison with the European Central Bank, carried out the fifth and final review of the financial sector assistance programme for Spain from 2 December to 13 December 2013. The International Monetary Fund also participated in the review, fulfilling its role as an independent monitor. Meetings were also attended by the European Stability Mechanism and the European Banking Authority.

Spain has pulled back from severe problems in some parts of its banking sector, thanks to its reform and policy actions, with the support of the euro area and broader European initiatives.

Spanish financial markets have further stabilised. Following the drop in sovereign bond yields, and the rise in share prices, financing conditions for large parts of the economy have improved, even if financing conditions for SMEs remain more challenging. The liquidity situation and the financing structure of the Spanish banking sector have further improved as bank deposits have been rising and Spanish banks are gradually benefiting from access to funding markets. The solvency position of banks has remained comfortable after the recapitalisation of parts of the banking sector, the transfer of assets to SAREB (the Spanish asset management company) and overall positive earnings results over 2013 so far. The recent legislative measures on deferred tax assets should support the solvency of the banking sector under the new EU rules on capital requirements.

The process of restructuring of banks having received State aid is well underway, guided by the restructuring plans as adopted by the European Commission. Efforts to implement the agreed measures need to continue as envisaged.

Compliance with the horizontal policy requirements in the Memorandum of Understanding is complete. This contributed to a thorough overhaul of the governance, regulatory and supervisory framework of the Spanish banking sector. Continuing on this path of close monitoring, pro-active supervision, advancing reform in the broader governance of the banking sector and fostering non-bank financial intermediation will help securing these achievements and contribute to a more resilient financial sector in Spain.

Nevertheless, the broader economic environment has continued to weigh on the banking sector, even if that impact has recently been receding. The private sector needs to reduce its debt stocks going forward, as heavy debt burdens continue to weigh on lending to the private economy. Lending to the economy, and in particular to the corporate sector, is still declining substantially, even if some bottoming out of that contraction process might be in sight. The profitability of the banking sector is therefore over the coming years affected by still contracting volumes of intermediation and continued pressure on asset quality, also due to further falling housing prices, as the adjustment in the real estate market has slowed down but is not yet completed. Therefore, supervisors and policy makers have to continue to monitor closely the operation and stability of the banking sector. Continued in-depth diagnostics of the shock resilience and solvency of the Spanish banking sector remain vital. This is also important in order to ensure a proper preparation of the pending assessment of banks' balance sheets by the ECB and EBA in the run up to the start of the Single Supervisory Mechanism. Policy makers and supervisors in particular will need to continue devoting close attention to the banks currently owned by FROB, in order to ensure proper governance and business models for these banks going forward. Furthermore, SAREB will have to continue with its efforts to meet the challenge of divesting its significant asset portfolio with the view of maximising its financial results and contributing to the proper functioning of real estate markets in Spain at large.

The recent encouraging macroeconomic developments bear witness of advancement in the process of adjustment of the Spanish economy and corroborate the expectation of a gradual recovery in activity and of an approaching end to employment destruction. The economic situation remains however subject to risks as imbalances continue to be worked out. Respecting fully the agreed fiscal consolidation targets - so as to reverse the rise in government debt - and completing the reform agenda remain imperative to return the economy on a sustainable growth path. Following progress during 2013, the policy momentum needs to be maintained to finalise ongoing and planned reforms - amongst which are the delayed law on professional services and associations, reforms of public administration, further strengthening of labour market policies, eliminating the electricity tariff deficit and the forthcoming review of the tax system - and to ensure effective implementation of all reforms.

With the programme coming to an end on 23 January 2014, the European Commission, in liaison with the ECB where indicated, will continue monitoring Spain's financial sector and the broader economy under all relevant EU surveillance processes.

Full press release


IMF

Programme achievements

Implementation of the financial sector programme by the Spanish authorities has been steadfast, and all of the programme’s specific measures are now complete. These include:

  • identifying undercapitalised banks via a comprehensive asset quality review and independent stress test;
  • taking actions to address these shortfalls, supported by funding from the European Stability Mechanism;
  • segregating certain types of real estate-related assets of state-aided banks into a specialised asset management company (SAREB);
  • adopting plans to restructure or resolve state-aided banks within a few years, with implementation now well underway;
  • adopting reforms to Spain’s frameworks for bank resolution, regulation, and supervision that should enhance financial stability and better protect the taxpayer; and
  • developing a major reform of the legal framework for former savings banks, which is now in the final stages in parliament and expected to be adopted by end-2013.

Efforts under the programme have made the banking system stronger, safer, and leaner, as has important policy progress at the European level. These developments have in turn supported financial stability and investor confidence—key prerequisites for solid and sustainable growth.

Remaining challenges and policy agenda

Notwithstanding this substantial progress and the recent stabilisation of output, important challenges for the financial sector remain, as the economy continues to undergo a process of private-sector deleveraging and fiscal consolidation that can restrain the pace of recovery, with concomitant challenges for bank profitability. Other uncertainties for the sector arise from unknowns regarding the methodology of the forthcoming European bank asset quality review and stress test, as well as the unwinding of the state’s ownership interest in intervened banks over the next few years.

It will thus be crucial to maintain the reform momentum. Sustained efforts will help safeguard and build upon the programme’s gains, while further enhancing banks’ ability to lend and support the nascent recovery:

At the Spanish level, priorities include continued pro-active monitoring and supervision, including continued efforts to ensure adequate provisioning and to help prepare banks for the forthcoming European tests. Efforts to ensure adequate provisioning will also foster asset disposal over time, helping to free space on banks’ balance sheets for new lending. Supervisors should also continue to encourage banks to build nominal capital—including by taking advantage of buoyant equity markets to boost share issuance, restraining cash dividends, and supporting profits through further efficiency gains—rather than relying on credit contraction to support capital ratios.

At the euro-wide level, priorities include further progress on Banking Union and continued monetary policy support to help reduce financial fragmentation, ease credit conditions and assist the recovery.

Strong efforts along these lines could help generate a self-reinforcing and virtuous cycle of falling funding costs, higher profitability and capital, easier credit conditions for households and businesses, and more job creation.

IMF-statement


ECFIN Country Focus

The 1997-2007 Spanish housing market upswing was unusually long and intense by historical and cross-country standards. This went hand in hand with rapid private credit growth and booming construction investment. Since 2008, a sharp and uneven correction has taken place. The magnitude and the pace of the correction in house prices are matters of great importance at the current juncture as they impact the real economy through consumption and investment dynamics and also the financial sector through the deterioration in the value of the assets in banks' balance sheets.

In order to depict the likely magnitude of these effects in 2013 this report follows a two-step approach. First the authors construct a baseline and an adverse short-term scenario for house prices, conditional on their main determinants. Second, they simulate the impact of the scenarios on: (i) the real economy via a Bayesian VAR including the main economic aggregates and (ii) the non-performing loans (NPL) rate as a function of house prices, unemployment and private debt.

The simulations point to a significant impact of house price changes on the real economy, affecting GDP, consumption and, above all, residential investment. The NPL rate also rises as house prices fall, although moderately so, after taking into account the impact of SAREB, the newly created asset management company.

ECFIN report: Spanish housing market: adjustment and implications



© European Commission


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