Spain goverment presentation used in the roadshow around the world where they expose the reality of financial sector

1. SPAIN’S ECONOMIC REFORM PROGRAMME
February 14th 2012

2. I.Highlights
II.Economic Policy: the structural reforms
•Fiscal Consolidation
•Budgetary and Financial Stability Law
•Financial Sector Reform
•Labour Market Reform
•Future Reforms
1

3. I. Highlights: Spain’s Economic Situation
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. 2

4. II. Economic Policy
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
3

5. II. Economic Policy: Spain’s Starting Point for
Fiscal Consolidation.
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
4

6. II.1 Economic Policy: Fiscal Consolidation
Path
Stability Programme of the Kingdom of Spain as established in April 2011 Vs.
latest estimates
% GDP 2011 2012 2013
Projected Deficit
Projected Deficit and GDP
‐6% ( ‐8%) ‐4.4% ‐3%
growth assumptions are off
by 2012.
GDP growth 1,3% (0,7%) 2,3% (‐1.5%)* 2,4%
assumption
* Bank of Spain estimates
Economic forecasts of the Commission to be
published in March
The commitment is to continue with the fiscal
consolidation path in accordance with the new
projections and assumptions
Structural Balance compromises will be
reinforced.
5

7. II.2 Budgetary Stability Law. All Government
levels involved.
Draft proposed by
Main objectives: Govt. on 27/01/2012
To become effective
Guaranteeing debt sustainability at all levels of government before June 30th
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
Budgetary and Financial Budgetary Planning and Control Preventive and Corrective Arm Transparency and Disclosure
Sustainability
•Affects all levels of Government:
GENERAL RULES: •Reinforcement of Budgetary Central, Regional, Local and Social •Surveillance at all stages of
control Security budgetary approval process
•Budgetary balance or surplus
•Expenditure ceilings also •Automatic correction of deficits •Reporting in terms similar to the
•No structural deficits introduced at the Regional and and debt thresholds ones under EDP
Local Government levels
•Expenditure growth capped below •Early warning system → adoption •Scope of information to be
headline GDP growth •Budget surpluses to be dedicated of corrective measures published broadened
to debt reduction
•Expenditure ceiling for all levels of •Establishment of sanctions in case
Government of non‐compliance
Source: Ministerio de Economía y Competitividad. 6

8. 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
7

9. II.1 Budgetary Stability Law. All Government
levels involved.
The Budgetary Stability Law envisages a coordinated effort in deficit reduction
and 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
8

10. II.3 Financial sector reform: Previous Measures.
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
9

11. II.3 Financial sector: current situation.
Real estate assets linked to loans to developers (€323 billion)*
Troubled assets (€175 billion) Non‐troubled assets (€148 billion)
Land and on‐going development Currently without provision coverage
projects Other troubled assets
Total (approx.): €88 billion Total (approx.): €87 billion
Current provision coverage: Current provision coverage:
around 31% on average around 27% on average
*Data at 30th June 2011
10

12. II.3 Financial sector: current situation.
€ billions 31% Current coverage of
exposure to troubled real estate Exposure (outstanding loans and
75 72,7
assets 25% foreclosed assets)
70 Currently covered with provisions
64,6
65
60
55
50
45
40
35
30
25 22,5
27%
20
15,0 16,2
15
10
5 4,0
0
Land Ongoing Finished
developments properties and
housing 11

13. II.3 Financial sector: the new reform
Instruments Objectives
• Significant increase in bank Improve confidence, credibility
asset write‐downs of about and strength of the system
€50 billion, both through Dispel doubts about the
provisioning and capital valuation of real estate assets
requirements (capital Encourage the banking sector to
buffer) place its real estate assets in the
• Signiticant incentives to market
consolidate the system Give institutions better access
to capital markets to encourage
• Transparent process lending
enabling the specific Facilitate a correction of excess
treatment for each type of capacity and improve efficiency
asset to be identified Strengthen governance of
• Financial effort supported institutions created through
by the financial institutions, mergers
without the need of public Further concentration
funds
12

14. II.3 Financial sector reform: cleanup of real
estate assets.
Instruments
Draft presented on
New provisions and capital requirements: € 50 billion 03/02/2012
Troubled assets
Specific provision
Extraordinary provisions must be set aside against profits. The total amount is
estimated to be €25 billion
Capital buffer
Creation 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 assets
Generic provisions
A 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
13

15. II.3 Financial sector reform: Cleanup of real
estate assets.
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
14

16. II.3 Financial sector. The Final Picture
Additional provisions and capital buffer to be added to existing coverage
%Coverage
Capital buffer
100
Additional provisions
90 Current provisions
80%
80
70 20%
65%
60
15%
50
29%
40 23% 35%
31%
30 27% 25%
10%
20
31%
27% 25%
10
0
Land Ongoing Finished
developments properties and
housing 15

17. II.3 Financial sector reform: Incentives for
mergers.
The objective: to have fewer, stronger, more accountable and better governed entities
Institutions in the process Advantages
of merging shall submit
• A feasibility plan and • Deadlines: The required
corporate governance provisioning and capital
measures that facilitate rapid buffering exercise is spread over
and efficient integration two years
• Commitments to extend credit • Write‐down the impairment of
assets against equity.
• Deadlines for completing
mergers will be significantly • The FROB’s margin of action is
tight extended by allowing the
acquisition of contingent
– Institutions must submit their
convertible bonds
projects by 30 May
• FROB’s capital increase from
– Applications will be decided
€9.0 billion to €15 billion
within one month
16

18. II.4 Labour Market. Current situation
The adjustment in our labour market traditionally takes place through
dismissals and not through wages
Tasas de variación interanual del PIB, empleo y salarios (2006-2011)
6,0 Annual change in GDP, employment and wages (2006-
2011)
4,0
2,0
0,0
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
7,95%
‐2,0 (2Q 2007)
‐4,0
‐6,0
‐8,0
PIB
GDP Employment
Empleo Remuneración por asalariado
Wage per employee
Source: Bank of Spain
17

19. II.4 Labour Market. Current situation
Dismissals are focused on temporary workers, which are mostly aged
under 25. This creates a huge duality in the Spanish labour market
Destrucción de empleos en % respecto2007 T 2007
Job losses in% compared to Q4 al IV
5,00%
0,00%
‐5,00%
‐10,00%
‐15,00%
‐20,00%
‐25,00%
‐30,00%
‐35,00%
Temporary Permanent
Fuente: INE, EPA Temporales
workers Indefinidos
workers
Source: INE. Labour Force Survey
18

20. 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 fraud
3. Reform the collective bargaining system, especially the opt‐
out clauses
4. Elimination of wage indexation systems
5. Increase the quality and effectiveness of public employment
services
6. Improve active employment policies and training of workers,
paying special attention to the problem of youth
unemployment
19

21. II.4 Labour Market Reform. Objectives
Royal Decree Law
presented by Govt. on
Objectives of the reform: 10/02/2012
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
20

22. 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
21

23. 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 collective
redundancies
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)
22

24. 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
23

25. 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 into
permanent ones: up to €1,500 per contract
Reintroduction of the prohibition to link different temporary
contracts for more than 24 months (January 1st, 2013)
24

26. 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
25

27. 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
26

28. 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
27

29. 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
28

30. More and updated information on the Spanish
economy.
http://www.thespanisheconomy.com
For data sources, please click links below each figure or table
29

31. Thank you.
Luis de Guindos– Minister of Economy and Competitiveness
Íñigo Fernández de Mesa – General Secretary of the Treasury and Financial Policy
SecretariaTesoro@tesoro.meh.es
Ignacio Fernández‐Palomero – Deputy Director for Funding and Debt Management
ifernandez@tesoro.meh.es
Rosa Moral
rmmoral@tesoro.meh.es
Leandro Navarro
lnavarro@tesoro.meh.es
Pablo de Ramón‐Laca
pramonlaca@tesoro.meh.es
Ignacio Vicente
ivicente@tesoro.meh.es
Rocío Chico For more information please contact:
mrchico@tesoro.meh.es Phone: 34 91 209 95 29/30/31/32 ‐ Fax:34 91 209 97 10
Reuters: TESORO
Carla Díaz Bloomberg: TESO
cdiaza@tesoro.meh.es Internet: www.tesoro.es
For more information on recent developments:
www.thespanisheconomy.com
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