Description
economic history of spain, background of the crisis, impact of the crisis resulting into unemployment, deflation etc.
SPANISH ECONOMIC CRISIS
AGENDA
? ?
? ?
ECONOMIC HISTORY OF SPAIN INTEGRATION WITH EUROPEAN UNION IN 1986 & ITS AFTER EFFECTS BACKGROUND OF THE CURRENT CRISIS IMPACT OF CRISIS
?
? ? ?
OUTPUT UNEMPLOYMENT PRICES DEBT
? ?
BANKING SYSTEM RISE FROM CRISIS
BACKGROUND
?
?
? ?
Spain shifted its political regime to a democratic format in the mid 1970’s This was after a long history of monarchy and republican governance This period saw severe oil crisis Given the high level of Spain’s dependence on oil imports (around 70% of requirement) this crisis resulted in:
? ? ?
plummeting productivity, an explosive increase in wages from 1974 to 1976, the steady outflow of labor from agricultural areas despite declining job prospects in the cities
UNEMPLOYMENT
ENERGY CONSUMPTION
BUDGET DEFICITS
?
Spanish Socialist Workers' Party government headed by Felipe González took office in late 1982.
? ? ? ?
Inflation was running at an annual rate of 16%, The external current account was US$4 billion in arrears, Public spending was large, Foreign exchange reserves had become dangerously depleted.
?
?
?
?
? ? ?
The Gonzalez government was able to undertake austerity measures. Orthodox monetary and fiscal policies were used, together with a series of vigorous retrenchment measures. Renovative structural policies were used ? Large, unprofitable state enterprises were closed Problem-ridden social security system was brought into better balance, More efficient energy-use policy was brought into effect. Labor market flexibility was improved, Private capital investment was encouraged with incentives.
SPAIN INTEGRATED WITH THE EUROPEAN UNION IN 1986
INTEGRATION WITH EU IN 1986
?
Era post 1986
? ?
Beginning of many economic changes in the nation Structural changes brought about in
?
? ?
financial conditions international relations and the labour market
? ? ?
? ? ? ?
Vibrant tourism industry (40bn Euros, 5% of GDP) Capital flow restrictions were removed Foreign capital moved into Spain (relatively capital poor and hence higher capital productivity) Focus of the economy shifted to non-tradables Tradable goods were imported Led to real appreciation of the peseta by 1992 Thereafter, peseta depreciated in real terms and current account showed signs of improvement
INTRODUCTION OF EURO IN 1999
?
Euro was launched on 1 Jan, 1999 Effects
? ?
?
?
? ? ?
?
Independent Monetary Policy was given away European Central bank was setup All barriers to free movement of capital removed Budget deficit stipulated to be less than 3% of GDP Debt to GDP ratio stipulated to be less than 60% of GDP Low Inflation Interest rates close to the EU average
EFFECTS OF EURO
? ? ? ? ?
?
?
Increased trade within the euro area by 5% to 10% Physical investment increased by 5% in the Euro-zone FDI has increased by 20% Inflation has not been affected Reduction of the risk associated with changes in currency exchange rates Increase in Financial Integration with Europe, Euro has significantly decreased the cost of trade in bonds, equity, and banking assets within the Euro-zone Euro has decreased the interest rates of Greece, Ireland, Portugal, Spain, and Italy
THE GROWTH STORY OF SPAIN
? ?
? ?
?
? ?
Liberalization of economic policies Financial aid from other European nations allowed infrastructural growth Significant capital inflow supported this growth Tourism represented an important source of income (export of services) Prudent fiscal and monetary policies also played a major role From 1986-97, Spain created 7.2 million jobs From 1997 the growth in the next decade was due to real estate BOOM and high level of consumption
MAIN ECONOMIC SECTORS
?
?
?
? ?
?
?
Automotive Industry: 6% of GDP, 11% of Jobs, 24% of exports Construction Food Distribution: supermarket with megastores(55%), discount & small retailers( 15% each) Chemicals : 53% of Total Production Textiles & Clothing : 7% of workforce, 4% of GDP, 4.5% of Exports IT Industry: Competition in terms of Price & innovation is present Paper and card packaging Industry
FINANCIAL AID
?
?
?
?
Since 1986 Spain has received a net total of EUR 78,131 million from the EU (contributions minus receipts) till 2005 These transfers have been essential for the transformation of the Spanish economy, and are a key reason of Spain’s long drawn success story in the 1990’s They have made it possible to finance a large number of social and regional cohesion projects and infrastructures that have complemented the considerable efforts of the various governments to modernize and build the welfare state This success was a major reason for attracting foreign investments as well
INFLATION
? ?
?
?
?
Inflation has been reduced to 3% from 1985 to 2005 Huge efforts have been made to reduce the high inflation rates that Spain has had historically With the exception of the recovery of prices between 1989 and 1992, inflation has been falling continuously, This enabled Spain to achieve the price convergence needed to join the euro in 1999. This success is attributable to the credibility of the Banco de España (independent since 1994) and, that of the European Central Bank (ECB)
INTEREST RATES
?
Interest rates have been reduced in line with EU countries On the same lines, rate on which Govt. takes Debt has also reduced This development is noteworthy in the post 1997-98 period (after the monetary union) Financing costs – costs of capital - have fallen significantly Impact clearly seen on the mortgage rates
?
?
?
?
?
Major factor behind buildup to crisis
OPENNESS OF ECONOMIC RELATIONS FDI
?
Huge amount of Direct Investments from 1985-2006
?
Yearly foreign investments 40Bn Euros/Year in the last decade
? ?
Privatization of the major Spanish public companies Businesses making huge investments
EXPORTS/IMPORTS
? ? ? ?
?
?
Post 1986, Spain followed an even more pro-market policy Integration in the European Union was the catalyst This trade reached its peak in 2000. In 2005, more than 70% of Spain’s external trade took place with EU states Although exports have grew every year, their share of GDP fell after Spain joined the EC. After introduction of the Euro, impossibility of devaluing the currency led to the decline in the competitiveness of Spanish exports
CURRENT ACCOUNT DEFICITS
?
?
?
?
?
Current account deficits in BOP is one of the structural problems of the Spanish economy As a result, Spain has needed external financing practically every year. Spain has only had a surplus (capacity for external financing) in 19851986 and 1996-1997 This was when devaluations of the peseta paved the way for an increase in exports (reducing their price in foreign currencies) and a decrease in imports (pushing up the price in the national currency). In recent years,
? ?
?
the growth of the Spanish economy, the impossibility of devaluing the currency following the introduction of the euro the decline in the competitiveness of Spanish exports
?
have pushed up the current account deficit to around 6% of GDP The trade deficit has increased from 34,916 mn US dollars in 1992 to 112,697 mn US dollars in 2006
LABOUR MARKET
?
? ? ? ? ?
Dependence on temporary contracts - high level of rotation of staff Resulting in POOR PRODUCTIVITY Less Investment in R&D in comparison with EU-15 Women employment rate only 80% of the EU rate in 2003 One of the highest unemployment rates in the EU Need of unskilled workforce in the agricultural or construction sector is very high but Spaniards don’t want to work in these sectors
?
?
These sectors resort to immigration of workers from poorer countries of South America and Africa In 1998, the immigration from those continents was around 30,000 persons. In 2007, the number of immigrants rose to 400,000
IMMIGRATION
Immigration of people from Africa & Asia is rising at a very fast speed, specially from Africa
THE BEGINNING OF CRISIS: THE EURO AND THE HOUSING BOOM
? ? ?
? ? ? ? ?
Spain being a part of EU got finances at lower interest rates. Inflation in Spain was relatively higher. Hence real interest rates were so low that people pulled out money from long term accounts and put them in property The baby boomer generation started buying houses High levels of immigration also caused increase in purchase of houses Banking competition created access and improved conditions of mortgage credit Fuelled an unprecedented demand for consumer goods and houses bought on credit Propelled the Spanish housing boom, which led to booms in the construction and mortgage lending
?
?
?
?
?
?
?
Investments in the Spanish housing sector made up almost 10% of the entire Spanish GDP Credit given liberally even to immigrants without credit checks Liberal mortgage policies of banks allowed giving loan of up to 100% of the value of house However the demand increased at a pace much faster than supply, resulting in price rises Without control over monetary policy Spain was unable to control this housing boom Finally the housing prices declined a stunning 26 percent in the month of December 2008 alone A large number of new houses are now lying unclaimed
GROWTH RATE OF HOUSE PRICES IN SPAIN
HOUSING BOOM TO BUBBLE
?
?
?
?
?
?
Spain now has as many unsold homes as the US, even though the US is about 6 times bigger. Spain is roughly 10% of the EU GDP, but accounts for 30% of all new homes built since 2000 in the EU. In 2006, for example, there were more than 700,000 new homes built in Spain. Housing price rises of 150% from 1998 The value of outstanding loans to Spanish developers has gone from just €33.5 billion in 2000 to €318 billion in 2008, a rise of 850% in 8 years. When construction sector debts are added, the overall value of outstanding loans rises to €470 billion. That’s almost 50% of Spanish GDP. Most of these loans are bad debts.
NOT JUST HOUSING BUBBLE
?
?
?
? ?
Bankruptcy of major companies in 2008 Loss of competitiveness against its main trading partners Huge TRADE DEFICIT( which reached 10% of GDP in mid 2008 ) No independent Monetary Policy Growing family indebtedness (115%) mainly due to the Spanish Real estate boom and rocketing oil prices
ECONOMIC CRISIS
?
Main causes of economic crisis
?
Severe housing market correction Trade deficits – absence of export competitiveness An industrial slump
?
?
?
Banking crisis caused by the housing correction and the recession's overall effects
EFFECT OF CRISIS ON GDP
? ?
?
During the third quarter of 2008 the national GDP contracted for the first time in 15 years and in Feb 2009 , GDP growth slumped to -4% Recession was officially declared
DECREASE IN INVESTMENTS
?
Investments fell at a rapid rate from 30% of GDP in mid 2007 to 20% in 2009
EMPLOYMENT
?
?
? ? ?
?
?
Most of the employment in Spain was in Construction business Responsible for 25% of all new jobs created between 1998 and 2007 Represents 13.9% of the total labor pool in 2007 When crisis struck, unemployment started rising Employment in this industry suffered an 8% decline in the 2nd quarter of 2008, a 13% decline in the 3rd quarter and a 20.7% slide in the 4th quarter Govt. tried to spend to decrease the employment – ended up increasing fiscal deficit 8 billion euro has been distributed directly to local authorities for public works projects meant to create 200,000 jobs
CONSTRUCTION SECTOR EMPLOYMENT
OVERALL UNEMPLOYMENT
No unemployment dole given due to low taxation policy
STIMULUS SPENDING
? ?
Levels of taxation has been historically low Hence, following the stimulus spending by Spanish government, Spanish public debt increased from 36.2% of GDP in 2007 to an estimated 55.6% of GDP in 2009
EFFECT OF EXCESS DEBT
? ?
? ?
?
?
?
?
Budget deficits around 11% of GDP as against EU stipulation of 3% Standard & Poor's has downgraded Spain's sovereign debt rating from AAA. This spells even greater difficulty for Spain in raising funds Spain had already depended heavily on external financing owing to it’s heavy current account deficit Now greater prices will have to be paid for debt and as insurance against default Monetary policy cannot be used to finance credit needs Spain has to depend on global demand for its debt to fund its stimulus packages. This is a problem at a time when credit is flowing en masse towards the safety of U.S. Treasury bills.
BORROWINGS OF SPAIN
?
Short term Borrowing in 2009 ? 3 month Letras : 19.7Bn Euros ? 6 month Letras : 31.6 Bn Euros ? 12 month Letras : 58.0 Bn Euros
?
?
?
? ?
Spain needs to find roughly 7 to 8 billion Euros a month to settle the current account Size of the deficit has come down from 11,000 million Euros, mainly due to reduction in the value of imports (due to collapsing internal demand and lower oil prices) Deficit on the income item in the monthly current account rising Volume of debt and the cost of serving it, have risen Balance between loans people outside Spain make to Spain as compared with loans people in Spain make to the rest of the world (for instance the remittances by immigrants) turned strongly negative in July and August after very robust performances in February and March
THE BANKING CRISIS
?
?
? ?
? ?
?
?
Spanish banks no longer have sufficient money to create mortgages enabling people to buy property Banks lent 33 million Euros LESS to Spanish households in August than they did in July This amounts to a sudden stop in credit Even lending to non-financial corporates has virtually dried up, with only 523 million in additional lending. Situation similar to the subprime days in the US Smaller savings banks are delaying the registering of failed credits, to avoid declaring losses Spanish banks are hiding their losses and rolling over debt to zombie companies. Probability of 800 bank offices to be closed by 2010
MACROECONOMIC SCENARIO 2009
2009( Growth rate in %) GDP Final Consumption Expenditure Gross Fixed Capital Formation National Demand (contribution to GDP growth) Exports of goods & Services Imports of goods & Services General Government Gross Debt (% of GDP)
?
-3.6 -2.4 -15.7 -6.4 -12.4 -18.7 55.2%
?
?
Over 3000 companies filed for bankruptcy in Spain in the first half of 2009 Burst of real estate bubble and the growth chart of the Spanish economy 55 percent of total job losses across the Euro-zone, and around 35 percent of job losses in the European Union
INDUSTRIAL OUTPUT
? ?
?
Industrial production declined by 20.9%in Jan 2009 compared to Jan 2008 and 22% in Feb 2009 compared to Feb 2008 The sharpest fall was in the automotive sector (10% of total output and 15%of total exports) Production declined by 47.6% in Feb 2009 as global demand for auto exports and industrial goods declined.
UNEMPLOYMENT RATE INCREASE TO 20%
CONSUMER CONFIDENCE DECLINE
?
?
? ?
Fall in consumer confidence – fall in consumption levels Retail sales lower Imports lower Overall trade deficit lower (despite fall in exports as well)
DEFLATION
? ?
?
After a record high inflation (5%) in June 2008, Spanish economy is now experiencing a downturn in prices Deflationary pressures in Spain, which historically is a high-inflation economy, are certain to rattle other European governments Spain recorded in January 2009 its lowest inflation rate in 40 years, followed shortly afterwards, in March 2009 by a negative inflation rate for the first time
DEFLATION
?
The reasons for deflation:
? ? ? ?
? ? ?
Global recession in 2009 Energy and commodity prices all y-o-y negative Dramatic decrease in OIL prices House prices, rents, factory gate prices etc, all set to fall as profits get squeezed Wage and salary earnings falling Unemployment is rising so there is less demand Inventory levels are very high so industries want to sell clear their stocks
VICIOUS CIRCLE OF DEFLATION
?
Trouble of Deflationary Pressure
?
Consumers will delay their purchases so there is decline in demand
PRODUCTION will be reduced and less laborers will be required thus increasing the unemployment rate This in turn will further decline the demand This is the spiral formed by DEFLATIONARY expectations which can end only by external stimulus
?
?
?
FUTURE PROBLEMS OF SPAIN
?
DEMOGRAPHIC ISSUES
?
? ?
The birth rate of Spain is 1.37births per woman in 2006, well below the “death rate” of 2.1 - while life expectancy is high Labor pool is shrinking while the retiree pool is growing Tax burden to support the retiring population increases on laborers, demand for housing will stall and result in deflation in housing markets
?
FINANCING ISSUES
?
?
In Spain, industries and companies rely on banks for funding - much more so than in the US, where companies are more comfortable getting funding from the stock and security markets With economy in the recession banks will not give loans easily thus further increasing the problems
TO RISE FROM THIS CRISIS
?
? ?
?
? ? ?
? ?
Create policies to speed up absorption of excess constructed houses Provide rental support to low income families Aim at fiscal consolidation - Bring public finance to a sustainable level More investment in human capital to boost productivity growth and enhance export competitiveness Improvement of institutional environment of business Reducing administrative burden Support innovation and research to gain competitive advantage Activate the unemployed Use partial unemployment benefit scheme than complete layoffs
?
Necessitate labour market reforms
? ? ?
Reform of Collective Bargaining system Promotion of the integration of women in the labour market Stability in employment, by reducing market segmentation
?
Bring about pension system reforms
?
?
?
Increase in retirement age to 67 Years A more flexible relationship between complementary social security and the public system Strengthening relationship between contributions and benefits
THANK YOU!!!
doc_411111569.pptx
economic history of spain, background of the crisis, impact of the crisis resulting into unemployment, deflation etc.
SPANISH ECONOMIC CRISIS
AGENDA
? ?
? ?
ECONOMIC HISTORY OF SPAIN INTEGRATION WITH EUROPEAN UNION IN 1986 & ITS AFTER EFFECTS BACKGROUND OF THE CURRENT CRISIS IMPACT OF CRISIS
?
? ? ?
OUTPUT UNEMPLOYMENT PRICES DEBT
? ?
BANKING SYSTEM RISE FROM CRISIS
BACKGROUND
?
?
? ?
Spain shifted its political regime to a democratic format in the mid 1970’s This was after a long history of monarchy and republican governance This period saw severe oil crisis Given the high level of Spain’s dependence on oil imports (around 70% of requirement) this crisis resulted in:
? ? ?
plummeting productivity, an explosive increase in wages from 1974 to 1976, the steady outflow of labor from agricultural areas despite declining job prospects in the cities
UNEMPLOYMENT
ENERGY CONSUMPTION
BUDGET DEFICITS
?
Spanish Socialist Workers' Party government headed by Felipe González took office in late 1982.
? ? ? ?
Inflation was running at an annual rate of 16%, The external current account was US$4 billion in arrears, Public spending was large, Foreign exchange reserves had become dangerously depleted.
?
?
?
?
? ? ?
The Gonzalez government was able to undertake austerity measures. Orthodox monetary and fiscal policies were used, together with a series of vigorous retrenchment measures. Renovative structural policies were used ? Large, unprofitable state enterprises were closed Problem-ridden social security system was brought into better balance, More efficient energy-use policy was brought into effect. Labor market flexibility was improved, Private capital investment was encouraged with incentives.
SPAIN INTEGRATED WITH THE EUROPEAN UNION IN 1986
INTEGRATION WITH EU IN 1986
?
Era post 1986
? ?
Beginning of many economic changes in the nation Structural changes brought about in
?
? ?
financial conditions international relations and the labour market
? ? ?
? ? ? ?
Vibrant tourism industry (40bn Euros, 5% of GDP) Capital flow restrictions were removed Foreign capital moved into Spain (relatively capital poor and hence higher capital productivity) Focus of the economy shifted to non-tradables Tradable goods were imported Led to real appreciation of the peseta by 1992 Thereafter, peseta depreciated in real terms and current account showed signs of improvement
INTRODUCTION OF EURO IN 1999
?
Euro was launched on 1 Jan, 1999 Effects
? ?
?
?
? ? ?
?
Independent Monetary Policy was given away European Central bank was setup All barriers to free movement of capital removed Budget deficit stipulated to be less than 3% of GDP Debt to GDP ratio stipulated to be less than 60% of GDP Low Inflation Interest rates close to the EU average
EFFECTS OF EURO
? ? ? ? ?
?
?
Increased trade within the euro area by 5% to 10% Physical investment increased by 5% in the Euro-zone FDI has increased by 20% Inflation has not been affected Reduction of the risk associated with changes in currency exchange rates Increase in Financial Integration with Europe, Euro has significantly decreased the cost of trade in bonds, equity, and banking assets within the Euro-zone Euro has decreased the interest rates of Greece, Ireland, Portugal, Spain, and Italy
THE GROWTH STORY OF SPAIN
? ?
? ?
?
? ?
Liberalization of economic policies Financial aid from other European nations allowed infrastructural growth Significant capital inflow supported this growth Tourism represented an important source of income (export of services) Prudent fiscal and monetary policies also played a major role From 1986-97, Spain created 7.2 million jobs From 1997 the growth in the next decade was due to real estate BOOM and high level of consumption
MAIN ECONOMIC SECTORS
?
?
?
? ?
?
?
Automotive Industry: 6% of GDP, 11% of Jobs, 24% of exports Construction Food Distribution: supermarket with megastores(55%), discount & small retailers( 15% each) Chemicals : 53% of Total Production Textiles & Clothing : 7% of workforce, 4% of GDP, 4.5% of Exports IT Industry: Competition in terms of Price & innovation is present Paper and card packaging Industry
FINANCIAL AID
?
?
?
?
Since 1986 Spain has received a net total of EUR 78,131 million from the EU (contributions minus receipts) till 2005 These transfers have been essential for the transformation of the Spanish economy, and are a key reason of Spain’s long drawn success story in the 1990’s They have made it possible to finance a large number of social and regional cohesion projects and infrastructures that have complemented the considerable efforts of the various governments to modernize and build the welfare state This success was a major reason for attracting foreign investments as well
INFLATION
? ?
?
?
?
Inflation has been reduced to 3% from 1985 to 2005 Huge efforts have been made to reduce the high inflation rates that Spain has had historically With the exception of the recovery of prices between 1989 and 1992, inflation has been falling continuously, This enabled Spain to achieve the price convergence needed to join the euro in 1999. This success is attributable to the credibility of the Banco de España (independent since 1994) and, that of the European Central Bank (ECB)
INTEREST RATES
?
Interest rates have been reduced in line with EU countries On the same lines, rate on which Govt. takes Debt has also reduced This development is noteworthy in the post 1997-98 period (after the monetary union) Financing costs – costs of capital - have fallen significantly Impact clearly seen on the mortgage rates
?
?
?
?
?
Major factor behind buildup to crisis
OPENNESS OF ECONOMIC RELATIONS FDI
?
Huge amount of Direct Investments from 1985-2006
?
Yearly foreign investments 40Bn Euros/Year in the last decade
? ?
Privatization of the major Spanish public companies Businesses making huge investments
EXPORTS/IMPORTS
? ? ? ?
?
?
Post 1986, Spain followed an even more pro-market policy Integration in the European Union was the catalyst This trade reached its peak in 2000. In 2005, more than 70% of Spain’s external trade took place with EU states Although exports have grew every year, their share of GDP fell after Spain joined the EC. After introduction of the Euro, impossibility of devaluing the currency led to the decline in the competitiveness of Spanish exports
CURRENT ACCOUNT DEFICITS
?
?
?
?
?
Current account deficits in BOP is one of the structural problems of the Spanish economy As a result, Spain has needed external financing practically every year. Spain has only had a surplus (capacity for external financing) in 19851986 and 1996-1997 This was when devaluations of the peseta paved the way for an increase in exports (reducing their price in foreign currencies) and a decrease in imports (pushing up the price in the national currency). In recent years,
? ?
?
the growth of the Spanish economy, the impossibility of devaluing the currency following the introduction of the euro the decline in the competitiveness of Spanish exports
?
have pushed up the current account deficit to around 6% of GDP The trade deficit has increased from 34,916 mn US dollars in 1992 to 112,697 mn US dollars in 2006
LABOUR MARKET
?
? ? ? ? ?
Dependence on temporary contracts - high level of rotation of staff Resulting in POOR PRODUCTIVITY Less Investment in R&D in comparison with EU-15 Women employment rate only 80% of the EU rate in 2003 One of the highest unemployment rates in the EU Need of unskilled workforce in the agricultural or construction sector is very high but Spaniards don’t want to work in these sectors
?
?
These sectors resort to immigration of workers from poorer countries of South America and Africa In 1998, the immigration from those continents was around 30,000 persons. In 2007, the number of immigrants rose to 400,000
IMMIGRATION
Immigration of people from Africa & Asia is rising at a very fast speed, specially from Africa
THE BEGINNING OF CRISIS: THE EURO AND THE HOUSING BOOM
? ? ?
? ? ? ? ?
Spain being a part of EU got finances at lower interest rates. Inflation in Spain was relatively higher. Hence real interest rates were so low that people pulled out money from long term accounts and put them in property The baby boomer generation started buying houses High levels of immigration also caused increase in purchase of houses Banking competition created access and improved conditions of mortgage credit Fuelled an unprecedented demand for consumer goods and houses bought on credit Propelled the Spanish housing boom, which led to booms in the construction and mortgage lending
?
?
?
?
?
?
?
Investments in the Spanish housing sector made up almost 10% of the entire Spanish GDP Credit given liberally even to immigrants without credit checks Liberal mortgage policies of banks allowed giving loan of up to 100% of the value of house However the demand increased at a pace much faster than supply, resulting in price rises Without control over monetary policy Spain was unable to control this housing boom Finally the housing prices declined a stunning 26 percent in the month of December 2008 alone A large number of new houses are now lying unclaimed
GROWTH RATE OF HOUSE PRICES IN SPAIN
HOUSING BOOM TO BUBBLE
?
?
?
?
?
?
Spain now has as many unsold homes as the US, even though the US is about 6 times bigger. Spain is roughly 10% of the EU GDP, but accounts for 30% of all new homes built since 2000 in the EU. In 2006, for example, there were more than 700,000 new homes built in Spain. Housing price rises of 150% from 1998 The value of outstanding loans to Spanish developers has gone from just €33.5 billion in 2000 to €318 billion in 2008, a rise of 850% in 8 years. When construction sector debts are added, the overall value of outstanding loans rises to €470 billion. That’s almost 50% of Spanish GDP. Most of these loans are bad debts.
NOT JUST HOUSING BUBBLE
?
?
?
? ?
Bankruptcy of major companies in 2008 Loss of competitiveness against its main trading partners Huge TRADE DEFICIT( which reached 10% of GDP in mid 2008 ) No independent Monetary Policy Growing family indebtedness (115%) mainly due to the Spanish Real estate boom and rocketing oil prices
ECONOMIC CRISIS
?
Main causes of economic crisis
?
Severe housing market correction Trade deficits – absence of export competitiveness An industrial slump
?
?
?
Banking crisis caused by the housing correction and the recession's overall effects
EFFECT OF CRISIS ON GDP
? ?
?
During the third quarter of 2008 the national GDP contracted for the first time in 15 years and in Feb 2009 , GDP growth slumped to -4% Recession was officially declared
DECREASE IN INVESTMENTS
?
Investments fell at a rapid rate from 30% of GDP in mid 2007 to 20% in 2009
EMPLOYMENT
?
?
? ? ?
?
?
Most of the employment in Spain was in Construction business Responsible for 25% of all new jobs created between 1998 and 2007 Represents 13.9% of the total labor pool in 2007 When crisis struck, unemployment started rising Employment in this industry suffered an 8% decline in the 2nd quarter of 2008, a 13% decline in the 3rd quarter and a 20.7% slide in the 4th quarter Govt. tried to spend to decrease the employment – ended up increasing fiscal deficit 8 billion euro has been distributed directly to local authorities for public works projects meant to create 200,000 jobs
CONSTRUCTION SECTOR EMPLOYMENT
OVERALL UNEMPLOYMENT
No unemployment dole given due to low taxation policy
STIMULUS SPENDING
? ?
Levels of taxation has been historically low Hence, following the stimulus spending by Spanish government, Spanish public debt increased from 36.2% of GDP in 2007 to an estimated 55.6% of GDP in 2009
EFFECT OF EXCESS DEBT
? ?
? ?
?
?
?
?
Budget deficits around 11% of GDP as against EU stipulation of 3% Standard & Poor's has downgraded Spain's sovereign debt rating from AAA. This spells even greater difficulty for Spain in raising funds Spain had already depended heavily on external financing owing to it’s heavy current account deficit Now greater prices will have to be paid for debt and as insurance against default Monetary policy cannot be used to finance credit needs Spain has to depend on global demand for its debt to fund its stimulus packages. This is a problem at a time when credit is flowing en masse towards the safety of U.S. Treasury bills.
BORROWINGS OF SPAIN
?
Short term Borrowing in 2009 ? 3 month Letras : 19.7Bn Euros ? 6 month Letras : 31.6 Bn Euros ? 12 month Letras : 58.0 Bn Euros
?
?
?
? ?
Spain needs to find roughly 7 to 8 billion Euros a month to settle the current account Size of the deficit has come down from 11,000 million Euros, mainly due to reduction in the value of imports (due to collapsing internal demand and lower oil prices) Deficit on the income item in the monthly current account rising Volume of debt and the cost of serving it, have risen Balance between loans people outside Spain make to Spain as compared with loans people in Spain make to the rest of the world (for instance the remittances by immigrants) turned strongly negative in July and August after very robust performances in February and March
THE BANKING CRISIS
?
?
? ?
? ?
?
?
Spanish banks no longer have sufficient money to create mortgages enabling people to buy property Banks lent 33 million Euros LESS to Spanish households in August than they did in July This amounts to a sudden stop in credit Even lending to non-financial corporates has virtually dried up, with only 523 million in additional lending. Situation similar to the subprime days in the US Smaller savings banks are delaying the registering of failed credits, to avoid declaring losses Spanish banks are hiding their losses and rolling over debt to zombie companies. Probability of 800 bank offices to be closed by 2010
MACROECONOMIC SCENARIO 2009
2009( Growth rate in %) GDP Final Consumption Expenditure Gross Fixed Capital Formation National Demand (contribution to GDP growth) Exports of goods & Services Imports of goods & Services General Government Gross Debt (% of GDP)
?
-3.6 -2.4 -15.7 -6.4 -12.4 -18.7 55.2%
?
?
Over 3000 companies filed for bankruptcy in Spain in the first half of 2009 Burst of real estate bubble and the growth chart of the Spanish economy 55 percent of total job losses across the Euro-zone, and around 35 percent of job losses in the European Union
INDUSTRIAL OUTPUT
? ?
?
Industrial production declined by 20.9%in Jan 2009 compared to Jan 2008 and 22% in Feb 2009 compared to Feb 2008 The sharpest fall was in the automotive sector (10% of total output and 15%of total exports) Production declined by 47.6% in Feb 2009 as global demand for auto exports and industrial goods declined.
UNEMPLOYMENT RATE INCREASE TO 20%
CONSUMER CONFIDENCE DECLINE
?
?
? ?
Fall in consumer confidence – fall in consumption levels Retail sales lower Imports lower Overall trade deficit lower (despite fall in exports as well)
DEFLATION
? ?
?
After a record high inflation (5%) in June 2008, Spanish economy is now experiencing a downturn in prices Deflationary pressures in Spain, which historically is a high-inflation economy, are certain to rattle other European governments Spain recorded in January 2009 its lowest inflation rate in 40 years, followed shortly afterwards, in March 2009 by a negative inflation rate for the first time
DEFLATION
?
The reasons for deflation:
? ? ? ?
? ? ?
Global recession in 2009 Energy and commodity prices all y-o-y negative Dramatic decrease in OIL prices House prices, rents, factory gate prices etc, all set to fall as profits get squeezed Wage and salary earnings falling Unemployment is rising so there is less demand Inventory levels are very high so industries want to sell clear their stocks
VICIOUS CIRCLE OF DEFLATION
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Trouble of Deflationary Pressure
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Consumers will delay their purchases so there is decline in demand
PRODUCTION will be reduced and less laborers will be required thus increasing the unemployment rate This in turn will further decline the demand This is the spiral formed by DEFLATIONARY expectations which can end only by external stimulus
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FUTURE PROBLEMS OF SPAIN
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DEMOGRAPHIC ISSUES
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The birth rate of Spain is 1.37births per woman in 2006, well below the “death rate” of 2.1 - while life expectancy is high Labor pool is shrinking while the retiree pool is growing Tax burden to support the retiring population increases on laborers, demand for housing will stall and result in deflation in housing markets
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FINANCING ISSUES
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In Spain, industries and companies rely on banks for funding - much more so than in the US, where companies are more comfortable getting funding from the stock and security markets With economy in the recession banks will not give loans easily thus further increasing the problems
TO RISE FROM THIS CRISIS
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Create policies to speed up absorption of excess constructed houses Provide rental support to low income families Aim at fiscal consolidation - Bring public finance to a sustainable level More investment in human capital to boost productivity growth and enhance export competitiveness Improvement of institutional environment of business Reducing administrative burden Support innovation and research to gain competitive advantage Activate the unemployed Use partial unemployment benefit scheme than complete layoffs
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Necessitate labour market reforms
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Reform of Collective Bargaining system Promotion of the integration of women in the labour market Stability in employment, by reducing market segmentation
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Bring about pension system reforms
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Increase in retirement age to 67 Years A more flexible relationship between complementary social security and the public system Strengthening relationship between contributions and benefits
THANK YOU!!!
doc_411111569.pptx