10 April 2012

Miguel Fernández Ordóñez: Financial crises - impact and challenges for Spain

Mr Ordóñez stated that the Spanish economy and its banking system suffer from the coincidence of three high-intensity crises, any of which may return at any time. He added that it appears highly unlikely that the conjunction of three such crises could recur for many years.

The joint outbreak of these two crises, the international one and the domestic one in Spain, led output to fall and public revenue to collapse. And this, together with a further increase in public spending aimed at softening the recession, meant that the budget surplus run from 2005 to 2007 turned into a deficit in 2008 and came to exceed 11 per cent of GDP in 2009. If this were not enough, in April 2010 a third crisis hit Spain: the sovereign debt crisis or the euro crisis.

The challenges Spain had to face at the onset of the crisis were enormous. Public attention has focused on cutting the budget deficit, but the tasks of reducing the towering debt accumulated by households and firms, and that of regaining lost competitiveness within a monetary union, are also huge. A Latin American colleague used a metaphor which, while exaggerated, clearly expressed the difficulty ahead of Spain: “regaining competitiveness”, he said, “is like painting a house. If your brush is the exchange rate and it is flexible, you simply let it move from the top downwards. But since in Spain you’re in the euro and you can’t move the brush, all you can do is move the house upwards from below."

The climate of pessimism accompanying the crises leads some to underestimate the effort made by Spanish private sector firms, suggesting that the external adjustment has been due exclusively to the fall in domestic demand. This decline naturally plays a part, but the improvement is also attributable to the relative gains in our export shares compared with other developed countries. During the years of crisis, Spain has seen its exports outgrow those of France, Italy and even Germany, and this situation should not worsen in the coming years.

Undoubtedly, the most significant effect of the global crisis on our banks was the fact that the path of gradual adjustment of imbalances that Spain had undertaken and which until then was the scenario shared by all analysts and national and international organisations, suddenly turned into a collapse of all macro-economic indicators. That obliged banks and savings banks to accelerate the clean-up of their balance sheets, and to set in train what has ultimately become a full-fledged industrial restructuring of the Spanish banking system.

As encouraging examples of Spain’s achievements during these years, I have chosen the progress made in correcting the current account deficit and in financial restructuring. However, I could have chosen other actions. For instance, the Pension Reform Law has made historically significant changes and, if its sustainability provisions are properly implemented, will enable not only the pensions of our generation, but also of our children’s, to be paid without problem. Spain has been one of the first European countries to have incorporated a balanced budget requirement into its constitution, with broad Parliamentary backing. A more recent example is labour market reform. This is of great importance, because Spain had not taken such a significant step in this area since the 1984 reform. If the 1984 reform allowed Spain to create millions of jobs and to increase the welfare of Spaniards during upswings, the reform approved this year should put an end to a situation in which dismissal and an increase in unemployment are the only way of adjusting the economy. This reform leaves workers and employers free to agree to increase competitiveness by increasing productivity and/or adjusting wages, with the only obstacles or impediments being those laid down by law.

Yet while much progress has been made in improving the resolution toolkit, the Banco de España needs to continue to be equipped with instruments to enable the performance of its supervisory tasks to be quick and simple rather than complicated and slow. For this purpose, it would be desirable to transfer a significant part of the powers of the Ministry of Economic Affairs and Competitiveness in relation to sanctioning, licensing, etc., to the Banco de España, in line with what the IMF has been suggesting for some time. Also, the FROB needs to be authorised to assume the powers of the shareholders in general meeting in relation to banks taken under official administration and legal requirements that delay asset and liability transfers need to be eliminated. As for the Banco de España, it should equip itself with supervisory instruments to ensure that problems can be promptly corrected, and it should distance itself from a legalistic system that envisages official administration only as the very last resort, when all legal requirements have been violated. Also, although the Banco de España’s professional and collegiate decision-making structure – one of its valuable traditions – must be maintained, it needs to be documented further and made more systematic, and the information that has begun to be supplied on the Banco de España’s website needs to be expanded.

Full speech

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