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SPAIN’S ECONOMIC REFORM PROGRAMME
February 14th 2012
I.Highlights
II.Economic Policy: the structural reforms
•Fiscal Consolidation•Budgetary and Financial Stability Law•Financial Sector Reform•Labour Market Reform•Future Reforms
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I. Highlights: Spain’s Economic Situation
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According to INE (National Statistics Bureau) estimates GDP growth in 2011 → 0.7%
Since mid 2011 growth prospects have deteriorated. Economy entered in recession during 4Q 2011 with quarterly GDP growth falling to ‐0.3% from 0,0% in the previous quarter.
Forecasts state that Spain will enter a renewed recession in 2012:‐1,7 % IMF.‐1,5% Bank of Spain.
The situation in the labour market deteriorated in the 4Q 2011.Labour Force Survey:
•Unemployment rate → 22,85% in 4Q 2011 from 21,52% in the previous quarter.•Youth unemployment → (aged under 25): 48,6% Vs. 45,8% previous quarter•Employment fell to 17.807.500 people, ‐348.000 workers vs. previous quarter (‐3.26% annual rate)
Registered Unemployment: 4.599.829 people January 2012 (+4,01% vs Dec 2011)Social Security affiliates: 16.946.237 January 2012→ ‐2,82% from 2011.
The Government’s new Economic Policy is based on three pillars
1. Budgetary and Macroeconomic Stability:
Fiscal Discipline
Budgetary Equilibrium: a Constitutional Mandate
Budgetary and Financial Stability Law implemented at all levels of the Public Administration
2. Bold and prompt structural reforms:
Financial sector consolidation; enhanced transparency and solvency requirements
Reform of the Spanish Labour market legislation and labour market policies
Increasing competitiveness and productivity in factor markets
3. Public Administration Overhaul
A Clear Mandate: Overall Majority at National and Regional Level
II. Economic Policy
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The deterioration in the economic indicators has entailed a deviation in the 2011 deficit target (from 6% to 8%/GDP): immediate measures amounted to € 15 bn (1.4%/GDP) to compensate for this deviation
€8.9 bn cuts in spending: minimum wage & civil servants wage freeze, 20% reduction in subsidies to political parties and social agents, rationalisation of administrative structures, no new public employment in 2012
€6 bn in tax increases: temporary increase in Personal Income tax, selective tax rate increase on real estate, oil subsidies removal
New Programme against tax evasion under evaluation: €8 bn additional income expected
II. Economic Policy: Spain’s Starting Point for Fiscal Consolidation.
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Stability Programme of the Kingdom of Spain as established in April 2011 Vs. latest estimates
II.1 Economic Policy: Fiscal Consolidation Path
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% GDP 2011 2012 2013
Projected Deficit ‐6% ( ‐8%) ‐4.4% ‐3%
GDP growth assumption
1,3% (0,7%) 2,3% (‐1.5%)* 2,4%
Projected Deficit and GDP growth assumptions are off by 2012.
Economic forecasts of the Commission to be published in MarchThe commitment is to continue with the fiscal
consolidation path in accordance with the new projections and assumptionsStructural Balance compromises will be
reinforced.
* Bank of Spain estimates
Main objectives:
Guaranteeing debt sustainability at all levels of government
Reinforcing Spain’s commitments with the investor community and with the EU in the framework of the Fiscal Compact
Transparency and ex‐ante control
All levels of the Administration involved
Draft proposed by Govt. on 27/01/2012To become effective before June 30th
II.2 Budgetary Stability Law. All Government levels involved.
Source: Ministerio de Economía y Competitividad.
Budgetary and Financial Sustainability
GENERAL RULES:
•Budgetary balance or surplus
•No structural deficits
•Expenditure growth capped below headline GDP growth
•Expenditure ceiling for all levels of Government
Budgetary Planning and Control
•Reinforcement of Budgetary control
•Expenditure ceilings also introduced at the Regional and
Local Government levels
•Budget surpluses to be dedicated to debt reduction
Preventive and Corrective Arm
•Affects all levels of Government: Central, Regional, Local and Social
Security
•Automatic correction of deficits and debt thresholds
•Early warning system → adoption of corrective measures
•Establishment of sanctions in case of non‐compliance
Transparency and Disclosure
•Surveillance at all stages of budgetary approval process
•Reporting in terms similar to the ones under EDP
•Scope of information to be published broadened
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II.2 Budgetary Stability Law. All Government levels involved.
Main Aspects
Public debt is introduced as a criterion of budget sustainability: public debt <60% of GDP
All levels of the Public Administration must present a balanced or surplus budget in ESA terms. None may incur a structural deficit
In the event of structural reforms having long‐term budget impact, a structural deficit of 0.4% of GDP may be incurred
A structural deficit may be incurred under exceptional circumstances (natural disasters, economic recession, or extraordinary emergency)
EU recommendations will be taken into account when setting stability and public debt targets
All Public Administrations must approve an expenditure ceiling consistent with the stability target and spending rules
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The Budgetary Stability Law envisages a coordinated effort in deficit reductionand control of all Public Administrations
Additionally, in order to support the regions an ICO (Spain’s financial agency) line amounting to € 10 bn has been created, which might be increased up to € 15 bn
Regional Governments requesting ICO support, will be subject to strict financial and fiscal conditionality
This facility may be used solely for two purposes:
Refinancing operations of debt outstanding as of December 31st 2011 maturing until June 30th 2012
Payment to suppliers of goods and services accounted for in the deficit figures of the Regions
II.1 Budgetary Stability Law. All Government levels involved.
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II.3 Financial sector reform: Previous Measures.
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2009: Creation of the Fund for the Orderly Bank Restructuring (FROB) to liquidate non‐viable entities and to support restructuring process of viable ones (up to € 36 billion with possibility of increasing up to € 99 billion if needed). Conditional on cost cutting measures
2009: Regulatory reform of saving banks
2011: Law to Strengthen Capital Base and Confidence: solvency requirements increased to 8%/10% in February 2011 and additional transparency requirements by the Bank of Spain. September 2011, end of capitalisation process
Saving banks restructuring process: saving banks have decreased in number from 45 to 17
→Despite these measures, more reforms are needed:
There are still doubts on the valuation of real estate assets owned by credit institutions. This generates:
• Difficulties for credit institutions to gain access to wholesale funding
• Insufficient funding available to the private sector
Further consolidation efforts are necessary
Land and on‐going developmentprojects
Total (approx.): €88 billion
Current provision coverage: around 31% on average
Other troubled assets
Total (approx.): €87 billion
Current provision coverage: around 27% on average
Non‐troubled assets (€148 billion)
Currently without provision coverage
Troubled assets (€175 billion)
Real estate assets linked to loans to developers (€323 billion)*
*Data at 30th June 2011
II.3 Financial sector: current situation.
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€ billions
75
70
65
60
55
50
45
40
35
30
25
20
15
10
5
0
25%
27%
31%
16,2
64,6
4,0
15,0
22,5
72,7Exposure (outstanding loans andforeclosed assets)
Currently covered with provisions
Land Ongoingdevelopments
Finishedproperties and
housing
Current coverage ofexposure to troubled real estate assets
II.3 Financial sector: current situation.
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II.3 Financial sector: the new reform
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• Significant increase in bankasset write‐downs of about€50 billion, both throughprovisioning and capital requirements (capital buffer)
• Signiticant incentives toconsolidate the system
• Transparent processenabling the specifictreatment for each type ofasset to be identified
• Financial effort supportedby the financial institutions, without the need of publicfunds
Improve confidence, credibilityand strength of the systemDispel doubts about thevaluation of real estate assetsEncourage the banking sector toplace its real estate assets in themarketGive institutions better accessto capital markets to encouragelendingFacilitate a correction of excesscapacity and improve efficiencyStrengthen governance ofinstitutions created throughmergers
Instruments Objectives
Further concentration
New provisions and capital requirements: € 50 billion Troubled assets
Specific provisionExtraordinary provisions must be set aside against profits. The total amount is estimated to be €25 billion Capital bufferCreation of a capital buffer of 20% (land) and 15% (current developments) for the most troubled assets (with the most uncertain valuation). To be charged against retained earnings, capital increases or conversion of hybrids (preferential convertible bonds, subordinated debt...). The estimated total amounts to € 15 billion
Non‐troubled assetsGeneric provisionsA generic provision of around 7% should be set aside for non‐troubled assets linked to real estate developments ‐since they have a higher risk than other portfolio assets‐ to prevent possible future impairments. This provision will be charged against profits and is estimated at € 10 billion
Deadline for establishing the specific and generic provisions and the capital buffer requirements: December 31st, 2012
II.3 Financial sector reform: cleanup of real estate assets.
Draft presented on 03/02/2012
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Instruments
For troubled assets, combining the specific provisions and the capital buffer, coverage for land would increase from 31% to 80% and for ongoing developments coverage increases from 27% to 65%. Coverage of the remaining troubled assets in the real estate development and construction sector (finished properties and housing) would increase to 35%
The restructuring, including the provisions and the capital buffer, would total approximately €50 billion. From 2008 to June 2011, the Spanish banking sector has set aside specific provisions of around €66 billion
The level of restructuring of the balance sheets is extremely high and represents a very significant price adjustment compared to the original valuation of the guarantees, due to a combination of two elements:
The new requirements are applied to the gross balance of exposures
The value of the guarantees is higher than the value of the loans (average “loan to value” 60%)
The criteria established in Banco de España Circular 4/2004 will be applied to real estate assets that become troubled in 2012 or in subsequent years, and to new transactions
II.3 Financial sector reform: Cleanup of real estate assets.
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0
10
20
30
40
50
60
70
80
90
100
%Coverage
35%
27%
80%
25%
10%
31%
29%
25%
65%20%
31%
27%
23%
15%
Additional provisions
Capital buffer
Land Ongoingdevelopments
Finishedproperties and
housing
Additional provisions and capital buffer to be added to existing coverage
Current provisions
II.3 Financial sector. The Final Picture
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• A feasibility plan and corporate governance measures that facilitate rapid and efficient integration
• Commitments to extend credit
• Deadlines for completing mergers will be significantly tight
– Institutions must submit their projects by 30 May
– Applications will be decided within one month
Institutions in the processof merging shall submit
Advantages
• Deadlines: The required provisioning and capital buffering exercise is spread over two years
• Write‐down the impairment of assets against equity.
• The FROB’s margin of action is extended by allowing the acquisition of contingent convertible bonds
• FROB’s capital increase from €9.0 billion to €15 billion
II.3 Financial sector reform: Incentives formergers.
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The objective: to have fewer, stronger, more accountable and better governed entities
The adjustment in our labour market traditionally takes place through dismissals and not through wages
7,95%(2Q 2007)
II.4 Labour Market. Current situation
‐8,0
‐6,0
‐4,0
‐2,0
0,0
2,0
4,0
6,0
06 I 06 II 06 III 06 IV 07 I 07 II 07 III 07 IV 08 I 08 II 08 III 08 IV 09 I 09 II 09 III 09 IV 10 I 10 II 10III 10 IV 11 I 11 II 11 III
Tasas de variación interanual del PIB, empleo y salarios (2006-2011)
PIB Empleo Remuneración por asalariado
Annual change in GDP, employment and wages (2006-2011)
GDP Employment Wage per employee
Source: Bank of Spain
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Dismissals are focused on temporary workers, which are mostly aged under 25. This creates a huge duality in the Spanish labour market
II.4 Labour Market. Current situation
Fuente: INE, EPA
‐35,00%
‐30,00%
‐25,00%
‐20,00%
‐15,00%
‐10,00%
‐5,00%
0,00%
5,00%
Destrucción de empleos en % respecto al IV T 2007
Temporales Indefinidos
Job losses in% compared to Q4 2007
Temporaryworkers
Permanentworkers
Source: INE. Labour Force Survey
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II.4 Labour Market. International recommendations
International Organizations main recommendations on the Spanish labour market:
1. Reduction of labour market duality. 2. Reduction of dismissal costs and improvement of their
management to prevent fraud3. Reform the collective bargaining system, especially the opt‐
out clauses4. Elimination of wage indexation systems5. Increase the quality and effectiveness of public employment
services6. Improve active employment policies and training of workers,
paying special attention to the problem of youth unemployment
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II.4 Labour Market Reform. Objectives
Objectives of the reform:
The approved labour market reform seeks to overhaul the labour market. Goals:
Improve efficiency and reduce labor market duality by decreasing dismissal costs
Enhance the employability of workers, especially the young, improving job intermediation and training
Adjust internal wage bargaining and reform the collective bargaining system
Implement effective mechanisms of internal flexibility within companies
Promote job creation through permanent contracts and other measures
Royal Decree Law presented by Govt. on
10/02/2012
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II.4 Labour Market Reform. Hiring conditions
I. Reduction of dismissal costs, in order to address labour market duality
Unfair dismissal: compensation of 33 days per year worked (up to 24 months). Down from 45 days and 42 months
This compensation will apply to new contracts. For contracts already in force, a mixed rule will be applied
Encouragement of the use of fair dismissal: compensation of 20 days per year worked (up to 12 months). New regulation:
Clarifies objective causes of fair dismissal
Eliminates procedural wages (wages paid during the duration of the judicial proceedings)
Eliminates “express dismissal”
Effect: fair dismissal to be the main channel to end the contract as oppose to now
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II.4 Labour Market Reform. Hiring conditions
I. Reduction of dismissal costs, to address labour market duality (cont.)
Reform of collective and objective redundancies to reduce legal uncertainty and high costs
Removes the administrative authorization required for collectiveredundancies
Reform of the judicial review of collective and individual redundancies
Public Administrations will be allowed to dismiss based on objective causes
Effect: increased and widespread use of collective fair dismissal (compensation of 20 days per year worked)
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II.4 Labour Market Reform. Hiring Conditions
II. Encouraging permanent contracts
Creation of a new permanent contract aimed to SMEs with 50 or fewer workers and self employed workers:
Duration of the probation period: up to 1 year
€ 3,000 tax deduction for these companies / self employed workers who hire their first employee (if less than 30 years)
Additional tax deduction of 50% of the employee’s unemployment benefits for a year
The employee may receive, along with his salary, 25% of unemployment benefits
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II.4 Labour Market Reform. Hiring Conditions
II. Encouraging permanent contracts
New bonuses for SMEs, specifically aimed at hiring:
Unemployed young workers (16‐30 years): €3,600 per permanent contract signed
Long‐term unemployed workers (over 45 years): up to €4,500 per permanent contract signed
Conversion of training contracts and substitution contracts intopermanent ones: up to €1,500 per contract
Reintroduction of the prohibition to link different temporary contracts for more than 24 months (January 1st, 2013)
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II.4 Labour Market Reform. Employability
III. Labour market intermediation and vocational training
Temporary Employment Agencies are now authorized to act as private placement entities.
This will prevent fraud in the unemployment benefit
Previously, only the public employment service and a few private agencies were involved in job intermediation
Improve professional training:
Development of a new individual right to professional training (20 hours per year). Future "training check" paid with public funds
Increased supply of professional training by allowing the direct participation of private agents
Creation of a new training account associated to each worker to improve training itinerary in case of unemployment
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II.4 Labour Market Reform. Employability
III. Labour market intermediation and vocational training
New training contract (for workers aged 16‐30):
No limit in the number of training contracts
Allows theoretical training within the company
Bonuses to encourage the use of this contract
Modification of the current permanent part‐time contract to allow extra hours and increase its flexibility
Regulation of teleworking to promote its implementation
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II.4 Labour Market Reform. Internal Flexibility
IV. Internal flexibility and collective bargaining
Facilitation of contract modifications on roles, duties, geographical location, wage and working time. Previously, the existence of rigidities allowed little room for contracts to adapt to demand or technological changes.
Removal of administrative authorizations to suspend the contract or to reduce the working time based on economic, technical, organizational or productive reasons
Collective bargaining reform:
Objective opt‐out clause of the collective agreement
Priority of enterprise collective agreement on the most relevant issues (e.g. wage, number of hours). Previously, sectorial and global collective agreements dominated contract conditions
Ultractivity. Application of extinguished collective agreements will be limited to 2 years. Previously, ultractivity had no time limit
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II.5 Future Reforms
Transformation and simplification of the National Regulatory Bodies, avoiding overlapping competences and fostering professionalism and less politically influenced organs.
Reduction of red‐tape and bureaucratic procedures, and removal of opening licenses for new SME’s
Reinforcement of the internal market at a national level, seeking a convergence towards a common regulatory framework in all 17 regions.
Energy Policy:
Tackling decisively the problem of the tariff deficit.
Nuclear cemetery decided (Villar de Cañas, Cuenca)
Supporting more efficient Renewable Energies in the production mix, in order to guarantee a clear integration of these energies, a reduction in emissions and a decrease in Spain’s energy dependence
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http://www.thespanisheconomy.com
For data sources, please click links below each figure or table
More and updated information on the Spanish economy.
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Luis de Guindos– Minister of Economy and Competitiveness
Íñigo Fernández de Mesa – General Secretary of the Treasury and Financial Policy [email protected]
Ignacio Fernández‐Palomero – Deputy Director for Funding and Debt Management [email protected]
Rosa [email protected]
Leandro [email protected]
Pablo de Ramón‐[email protected]
Ignacio [email protected]
Rocío Chico [email protected]
Carla Dí[email protected]
For more information please contact:Phone: 34 91 209 95 29/30/31/32 ‐ Fax:34 91 209 97 10
Reuters: TESOROBloomberg: TESO
Internet: www.tesoro.esFor more information on recent developments:
www.thespanisheconomy.com
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Thank you.