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Spain’s goals may need extra time
18 July 2010 By Eugene Kiernan
La s t Mo n d ay night, crowds th ronged the Puerta del Sol in the centre ofMadrid to welcome home their national team that had taken on the world and won.
How Spain won the World Cup - almost as much as the fact that they won - is a source of great pleasure to many of their fans throughout Spain. Vicente Del Bosque, the coach, and his predecessor Luis Aragonés were pivotal in reforming both the national team’s structures and approach, turning them from eternal nearly-men into winners.
Touch replaced muscle as fast paced possession football saw them through Euro 2008 and to the top of the world today.
The Spanish economy needs to pull off a similar feat as it battles against several headwinds, which are threatening the country in a manner that could leave an even more lasting impact than this World Cup win.
For some, including the rating agencies, Spain as a eurozone economy has spent much of the past six months in the relegation zone compared to many of its peers.
While not in the same league or garnering the same headlines as Greece, it has been penalised with higher borrowing costs compared to the stronger credits in Europe. Spanish ten year bonds today trade at a yield that is a full 2 per cent higher than Germany.
While this is not as demanding a level as Irish bonds, the situation for Spain has worsened, compared to ourselves, in the year to date.
Part of the issue for Spain is that a different approach was being adopted a year ago to beat the eurozone downturn.
The socialist government of José Luis Zapatero was keen to promote a Keynesian approach and spend its way out of the recession.
Plan E, which was the initiative to create employment, was visible throughout the country - from the remodelling of central Madrid to the resurfacing of the paseos along the southern coasts. It did provide a temporary boost to jobs, but the sheer cost, coupled with heightened scrutiny of public sector deficits as Greece unravelled, forced a rethink.
Today, Spain is very much on the austerity diet.
In May, a tough budget was squeezed through parliament by one vote. Public sector salaries will be cut, labour laws reformed and a whole range of benefits axed to restore order to the public finances. General strikes have been threatened, but not until September - which in itself says something about the degree of opposition.
There is no doubt that the social fabric of Spain will change as a result of this crisis. Financially, one of the major changes will be in the shape and structure of the banking landscape.
The Cajas, a group of unlisted regional savings banks, were a prime source of finance during the housing boom, and are now saddled with huge property-related losses.
This problem has been long recognised, but there is now finally a sense of urgency about how to deal with the mess.
Twelve months ago, the government saw itself as a facilitator looking to coax and persuade the Cajas to reform.
Now the Central Bank has stepped in, seizing control of some of these entities, such as Caja Sur in the south.
Others have announced mergers in recent weeks. Perhaps most far reaching though, will be the move to allow these savings banks to sell up to 50 per cent of their equity to private investors.
There are also proposals on the table to curb political meddling in the Cajas, by restricting the number of elected public officials on their boards. The Cajas will need capital injections, and those are available.
Fitch, the ratings agency, last week was broadly happy on the basis of its own stress tests that the country’s €99 billion fund would be enough to cover domestic loan losses.
But it will be a very different landscape in the future.
The Spanish economy shrank by nearly 4 per cent in 2009, and it is unlikely to post a positive number in 2010. For 2011, the OECD is forecasting growth of just under 1 per cent. Government forecasts are rosier.
Taking the pulse of the property market points to house prices down by about 5 per cent in the past 12 months.
This may underestimate the actual decline, but is still a better run rate than in the middle of 2009 when house prices were declining by almost 10 per cent rate.
Unemployment has soared, with nearly four million people looking for work as the unemployment rate hits the 20 per cent mark. Among immigrants, the unemployment rate is 30 per cent.
According to the OECD, more than half of the new unemployed in the entire eurozone area during the crisis are Spanish. Job insecurity, falling house prices and the about-turn in government policy have naturally unnerved consumers.
In Spain, the mood among consumers is at a lower ebb than 12 months ago.
This pessimism is not going to be helped by a Vat increase from 16 per cent to 18 per cent on July 1.
So it’s a very difficult playing surface for the minority socialist government as it strives to maintain a balance between austerity and reform.
Ultimately, the proposed reforms in the labour market, such as the reduction in the level of severance payouts (where in some cases the rate will go from 45 days’ worth of salary per year worked to 25),will make for a more responsive and efficient jobs market. Equally, the reforms in the banking system are long overdue and will be pivotal in getting Spanish companies and financial firms renewed access to global capital markets.
There’s still a lot of negotiating and brinkmanship ahead to achieve the financial targets.
The plan is to reduce the public deficit to6 per cent of GDP by next year.
This would be a turnaround of 5.2 per cent of the economy, or about €50 billion. This is very ambitious.
There does seem to be a growing consensus among Spanish workers and voters that some action will have to be taken.
There was less than universal support for some of the recent incidents of industrial action. A recent FT/Harris poll showed that 71 per cent of Spaniards felt that public spending cuts were necessary to help long term economic recovery.
This was a higher outcome than Britain, Italy and Germany.
Spanish policy makers were forced into a change of tactics as global investors grew concerned over eurozone deficits.
There is, today, a greater and welcome sense of urgency around many of the areas crying out for reform.
Next September, when a new budget is presented, and threats of general strikes crystallise or not, will be a pivotal moment.
The government, naturally, will do everything to don the mantle of the ‘campeones’, and seek to build support around a common purpose. But to reach its targets, like the footballers did in Johannesburg last weekend, it too may need extra time.
Eugene Kiernan is Head of Investment Solutions at AIB Investment Managers (AIBIM), a member of the AIB Capital Markets division.
AIBIM is regulated by the Financial Regulator
Kathleen Barrington is away
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