Live News From Spain As It Happens

MADRID — Spain's Socialist government is watching its political power dwindle as it struggles to chart a path out of deep financial trouble, failing so far to satisfy conflicting demands to cut its budget and stimulate job creation.

The coming months could bring far deeper trouble as Prime Minister Jose Luis Rodriguez Zapatero moves to reform the country's labor market, risking national strikes and the loss of support from trade unions, a core source of his center-left party's strength.

Although there appears to be no immediate threat of it falling, Zapatero's minority government is already running into serious trouble.

A package of austerity measures passed by one vote in parliament's lower chamber Thursday. Fitch Ratings downgraded Spanish debt Friday. A poll published in the northeastern regional newspaper Periodico de Catalunya on Saturday said the conservative opposition Popular Party would win up to 42 more seats than the Socialists in the 350 member parliament — coming close to an overall majority — if elections were held now.

The austerity package aimed at slashing spending by euro15 billion ($18.4 billion) over two years included measures such as freezing pensions and cutting civil servants' wages.

But investors and lenders including the IMF are demanding reform of the labor market including overhauls of hiring and firing rules, encouragement of part-time contracts and moves to put the long-term unemployed and the young to work.

The governmment plans to begin negotiating with unions and hopes to arrive at a consensus about the changes by the end of May.

Union leaders have said that if the government presses ahead with implementing reforms without union approval, they will call on their members to vote for a general strike that could paralyze the country and probably cause deep ripples in global markets.

The conservative newspaper El Mundo, which supports the opposition, said Saturday that the government was trapped, caught between growing unpopularity and the financial realities that have forced it to abandon public spending and take on politically unappealing austerity measures.

"The government is cornered," the paper wrote.

Read more...

Introduction

Spain’s economy needs far-reaching and comprehensive reforms. The challenges
are severe: a dysfunctional labor market, the deflating property bubble, a
large fiscal deficit, heavy private sector and external indebtedness,
anaemic productivity growth, weak competitiveness, and a banking sector with
pockets of weakness. Ambitious fiscal consolidation is underway, recently
reinforced and front-loaded. This needs to be complemented with
growth-enhancing structural reforms, building on the progress made on
product markets and the housing sector, especially overhauling the labour
market. A bold pension reform, along the lines proposed by the government,
should be quickly adopted. Consolidation and reform of the banking system
needs to be accelerated. Such a comprehensive strategy would be helped by
broad political and social support, and time is of the essence.


The outlook: a weak and fragile recovery
1. The necessary adjustment is underway and output has stabilised.
Imbalances accumulated during the long boom have begun to unwind, with the
current account deficit halving as private savings surged and housing
investment fell. Competitiveness has begun to improve as productivity rose
and the core inflation differential turned negative. The large fiscal
deficit is beginning to fall. Output rose slightly in the first quarter,
ending the long and deep recession. But unemployment has soared as firms
adjusted employment rather than wages or working hours.

2. We project the nascent recovery to be weak and fragile. Our central
scenario is one of continued adjustment of the various imbalances with
growth rising gradually to 1½-2 percent in the medium term. Domestic demand
recovers only slowly, with private demand weighed down by continued
uncertainty, high unemployment, and the need to reduce indebtedness, and
public demand by large-scale consolidation. Stronger export growth, however,
should support the recovery. Despite rebounding energy prices and the VAT
increase, inflation would remain subdued, helping regain competitiveness.
Slowing population growth, high unemployment, and weak investment all weigh
on potential growth, underlining the importance of growth-enhancing
structural reforms.

3. The uncertainty around this outlook is large. On the upside, household
consumption could grow more rapidly as confidence firms, and the global
recovery and the weaker euro may induce faster export growth. On the
downside, the economy may stagnate as the weakness in private demand and
fiscal consolidation interact, especially if reforms to boost
competitiveness and growth are timid. Financial market conditions may also
deteriorate further, raising borrowing costs for both the government and the
private sector.

The policy agenda: rebalancing the economy and boosting confidence

4. Policy should focus on fostering the smooth rebalancing of the economy.
This calls for urgent and decisive action on:

• making the labour market more flexible to promote employment and its
reallocation across sectors;

• fiscal consolidation to put public finances on a sustainable footing; and

• banking sector consolidation and reform to cement the soundness and
efficiency of the system.

Such broad reforms in many sectors simultaneously would produce synergies.
For example, labour market reform coupled with further liberalisation of
product and service markets would boost investment and employment and reduce
prices, making fiscal consolidation easier and strengthening banks. Such
reforms would also support Spain’s long-term convergence with higher-income
peers. These reforms should be implemented pro-actively to boost financial
market sentiment and underpin credibility.

Structural reforms to spur growth through increased competitiveness and
employment

5. The labour market is not working. Unemployment is structurally high and
excessively cyclical, reflecting the high degree of duality in labor
markets. The wage bargaining system, which hamstrings wage and firms’
flexibility, is ill-suited to membership of a currency union. The government
has provided some broad guidelines for reforming the labor market to be
negotiated by the social partners. An agreement is expected by the end of
May.

6. A radical overhaul of the labour market is urgent. The reform will need
to be ambitious and comprehensive if it is to significantly change labor
market dynamics and to avoid missing an historic opportunity. In particular:

• reducing duality and encouraging permanent hires requires lowering
severance payments to at least EU average levels and preventing excessive
use of unfair dismissals;

• boosting wage flexibility and employment requires coupling this reduced
protection of permanent contracts with decentralising wage setting (for
example by moving to an opt-in rather than opt-out system for collective
bargaining) and eliminating indexation.

Care should be taken that any reform does not increase the fiscal cost of
the system or make temporary employment more difficult in the near term.
Ideally the social partners will quickly deliver such an overhaul, but if
not, the government will need to follow through on its commitment to take
action itself, including on collective bargaining.

7. Commendable progress in recent years on product and service market reform
needs to continue. Many important measures have been taken recently,
especially in transposing the EU Services Directive (though implementation
will be critical), and in the housing sector in which incentives for buying
homes have been partially eliminated and the rental sector is being
promoted. Given the pressing need to boost growth and competitiveness,
however, Spain should aim to be among the top performers in terms of product
and service market liberalisation. The priority should be to further reduce
restrictions on retail trade, professional services, and the rental market.

Fiscal policy: restoring sustainability

8. Ambitious fiscal consolidation is underway to reach the three percent of
GDP deficit target by 2013. To achieve the implied 10% of GDP improvement in
the primary balance from 2009 to 2013, the government has taken a wide range
of measures, including the fiscal package approved by the Cabinet last week.
We fully support this package. It significantly strengthens and front loads
the envisaged adjustment and enhances credibility by taking concrete and
bold measures, such as cutting public sector wages. The new path for the
deficit is also appropriate. This path implies cutting the deficit by more
than five percentage points of GDP in 2010 and 2011 and would put the
government debt ratio (which would still be lower than the euro area
average) onto a downward path in a reasonable timeframe.

9. Achieving these targets will be critical and any slippage should be
aggressively pre-empted. Risks to achieving the targets come from both the
implementation of the measures and the underlying projections of a fairly
rapid recovery. Any slippage in attaining fiscal targets will make it
difficult to put government debt on a firm downward path in a reasonable
timeframe and undermine credibility. It is thus critical that the supporting
structural reforms are quickly implemented and additional high-quality
adjustment measures are prepared in advance to allow pre-emptive correction
of any prospective slippages and avoid surprises. Such measures should
protect the most vulnerable segments of society and could include further
reducing spending (which has increased sharply over the last decade), and
raising revenue by reducing tax benefits and further increasing relatively
low VAT and excise rates.

10. Bold pension reform should also be implemented soon. Spain faces strong
spending pressures over the longer term due to ageing and slower population
growth. The government has outlined possible reforms, including raising the
retirement age to 67. These measures, together with others (in particular,
an automatic link to life expectancy) would strengthen the sustainability of
the system and bring Spain closer in line with European peers that have
already reformed their pension systems. As such reforms would boost fiscal
sustainability without undermining growth, they should be quickly adopted.

11. Stronger fiscal frameworks could help. As the bulk of spending occurs in
Autonomous Communities, their role is critical, underscoring the need for
strong mechanisms to ensure they deliver the needed adjustment.
Institutionalising spending review processes could also help improve the
quality and durability of spending reductions. It might also be useful to
consider options to bolster the credibility of fiscal policy, for example,
by establishing an independent fiscal council (like Sweden’s or Belgium’s)
to provide objective analysis of fiscal developments and long-term
sustainability issues.

Banks: accelerating consolidation and reform

12. The banking sector is sound but remains under pressure. Although
impaired assets have increased with the downturn, Spanish banks overall
report robust capital and provision buffers, supported by a strong
supervisory framework. But the risks remain elevated and unevenly
distributed across institutions, focused mainly on the savings banks. The
situation is also complicated in that much of banks’ repossessed real assets
is land, which is particularly difficult to value. On the liquidity side,
although funding is generally of good duration, market conditions remains
difficult and access limited. Further strains may arise from the unwinding
of the exceptional liquidity measures by the ECB, the ending of the funding
guarantee scheme, and from the intense competition for deposits. These
funding difficulties, coupled with lower earnings due to weak credit growth,
provisioning for troubled assets and the system’s overcapacity, will likely
lead to pressure on profitability.

13. Consolidation needs to accelerate to reduce overcapacity and produce
more robust institutions. Progress, under the aegis of the Fund for Orderly
Bank Restructuring (FROB), has been too slow, though the recent agreement
between the two main political parties in this regard is encouraging. Much
more progress needs to happen before the FROB deadline of end-June 2010. The
Bank of Spain should be prepared to intervene promptly if pockets of
weakness remain. To this end and to enhance investor confidence, a
comprehensive and transparent bank-by-bank “diagnostic” based on
conservative assumptions on asset valuation and prospects could usefully be
carried out.

14. The legal framework of savings banks should be updated for the new
economic context. Performance among savings banks is highly diverse and the
sector has an important role to play, but the current legal structure is not
well suited to Spain’s needs going forward. Under the current framework,
cross-region mergers still need to be approved by regional governments, the
sector remains closed to external investors, and savings banks’ capacity to
raise external capital remains limited, putting public funds are at risk.
The legislative and policy priority should be to: (1) reduce political
influence in savings banks; (2) enhance their ability to raise external
capital, and (3) offer an opportunity to transform into stock-holding
companies, and, indeed, requiring this for systemically important savings
banks. This reform should be implemented promptly so savings banks can have
the full range of options to raise capital as soon as possible.

Europe's stock markets became a sea of red today as traders fretted about the state of several eurozone economies and the dreaded word "contagion" was bandied around dealing rooms across the continent.

Spain was particularly badly hit. Investors doubt whether the government will honour its pledge to cut its budget deficit and question whether its faltering economic growth will be enough to sustain debt payments. The Ibex index of Spain's most heavily traded stocks plunged by 3%, more than other European indexes, as the Spanish treasury was forced to offer investors a better return to get the sale of a fresh tranche of government bonds away.

Spain sold €2bn (£1.7bn) of six-month bills, paying an interest rate of 1.2%. Just last month the rate was 0.7%, showing how quickly concerns about Spain's ability to cope with its deficit have ballooned.

The country is at the centre of the storm after its central bank seized control of CajaSur, a small, southern savings bank hit by the property collapse.

"CajaSur's seizure by the Bank of Spain over the weekend, though of no systemic importance, has highlighted Spain's collapsing property market and the exposure of the banking system to the ailing domestic economy," said Gavan Nolan, a credit analyst at Markit. "But it served as a reminder than the effects of Spain's bubble economy bursting have still to be played out, and other savings banks are expected to run into difficulties."

Across Europe, markets went into reverse with Germany's DAX index losing 2.3% and France's CAC-40 plummeting 2.9%. Watching from the other side of the Atlantic, where the Dow Jones slumped at the opening, one New York stock exchange floor trader summed up the situation: "It seems like the Europeans are playing 'tag, you're it'.

"First it was Greece and now it's maybe Spain or Portugal. We know someone else is next."

Read more at Guardian.co.uk

(RTTNews) -  Spanish government  on Thursday approved a €15 billion ($19bn) austerity plan aimed at reducing the country's large fiscal deficit and easing concerns that Spain could follow Greece into a debt crisis.

The tough austerity package, which was announced by Prime Minister Jose Luis Rodriguez Zapatero last week, was approved during a Cabinet meeting on Thursday. The tough cost cutting measures are expected to save the Spanish government 15 billion euros in 2010 and 2011.

The plan is expected to reduce Spain's deficit from its current level of more than 11 percent of gross domestic product to 6% of GDP by 2011 and to 3% by 2013. The plan calls for slashing salaries of Cabinet ministers and other senior officials by 15 percent.

It also includes an average five-percent pay cut for public sector workers from June, and a pay freeze from 2011. However, workers unions in Spain have reacted to the austerity plan and have called a public sector strike on 8th June to protest against government's tough cost cutting measures.

The latest austerity plan is over and above a 50-billion-euro austerity package announced in January to reduce Spain's budget deficit from the 11.2% of GDP posted last year to the eurozone limit of 3% by 2013.

The approval of the latest set of austerity measures by the Spanish government comes a day after official data indicated that the country has managed to move out of recession in the first quarter of this year. Data released Wednesday reveled that the country had posted a growth rate of 0.1% in the first quarter, mainly due to a rise in exports and household spending.

Spain had entered recession in the second quarter of 2008 amidst the global financial meltdown and the property market crisis. Though Spain managed to move out of recession in the first quarter, the country's unemployment rate remains at 20%, which is almost twice the eurozone average.

Source:  RTT News

IT HAD a huge housing boom, and is now dealing with the fallout, writes Martin Hutchinson, contributing editor at Money Morning.

It has a left-of-center government and a big budget deficit, but relatively low debt in relation to its gross domestic product (GDP). And it has a worrisome current account deficit.

I’m talking, of course, about Spain, which investors clearly fear will be the next domino to fall as a result of the Greek debt contagion.

I disagree.

The Spain debt outlook is nothing like that of its Greek counterpart. When you get right down to it, Spain looks more like the United States than it does the other European "PIGS" (Portugal, Ireland, Greece and Spain, or "PIIGS," if you wish to include Italy). It’s because of those U.S. similarities that Spain is fairly unlikely to share the fate of its Mediterranean neighbor, Greece, which is essentially insolvent.

Indeed, in one respect, Spain’s position is actually much better than its US counterpart. We’ll see why shortly.

Like Greece, Spain suffered from a reviled dictatorship that exited the scene in the 1974-1975 time frame. The dictatorship in Greece ended in 1974 with the collapse of the "Regime of the Colonels", while the curtain came down on Spain’s autocracy in December 1975 with the death of General Francisco Franco.

However, both the tenure of the dictatorships and the two countries’ reactions to the collapse of their respective regimes were quite different.

Greece’s dictatorship lasted only seven years, was never stable, and occupied itself mostly with corruption, military expenditure and saber rattling in Cyprus. Franco, on the other hand, after winning a truly devastating civil war in 1939, devoted himself over his remaining 36 years to developing his country’s economy on a more or less free-market basis, with low public spending, while maintaining an international posture of caution and neutrality.

With the two countries traveling down such divergent paths, it’s no surprise that they experienced very different outcomes. By 1975, Greece was a total basket case, with only its offshore (and non-taxpaying) shipping sector flourishing, whereas Spain was a rapidly developing tourist magnet, with a substantial industrial economy behind it.

After 1975, the two countries continued to develop very differently. Greece – which had exiled its king, Constantine II – elected the leftist socialist Andreas Papandreou and in 1981 joined the European Union (EU), where it became a master in the art of subsidy corruption: After all, Greece was the union’s poorest country at that time.

Spain, on the other hand, kept King Juan Carlos, who thwarted a coup in 1981, elected a moderate social democrat government under Felipe Gonzalez followed by a very good center-right one under Jose Maria Aznar. The nation also developed the best luxury tourism sector in Europe, together with one of its best business schools in the University of Navarra’s IESE.

Today, while both countries have similar per-capita GDPs – $33,700 for Spain and $32,100 for Greece – Spain is ranked 32nd on Transparency International’s Corruption Perceptions Index, while Greece is ranked 71st, below much poorer countries like Bulgaria and Ghana.

Spain’s debt load – at about 55% of GDP – is less than half of its Greek counterpart. Clearly, Greece’s GDP per capita needs to be sharply deflated for the country to regain competitiveness; it’s much less clear that Spain needs to do the same.

In addition to a budget deficit of 11.5% of GDP in 2010…which is very similar to that of the United States…as well as a banking and real estate mess (though the largest bank, Banco Santander is pretty solid), and its relatively low debt, Spain (also like its US counterpart) also has itself a left-leaning government with a proclivity for overspending.

Prime Minister Jose Luis Rodriguez Zapatero was unexpectedly elected on an anti-US platform after a terrorist attack in 2004, and was re-elected in 2008, both times by small majorities. Zapatero is undoubtedly responsible for much, though not all, of Spain’s budget problems; he undertook two economically damaging "stimulus" packages in 2008 and 2009 and has raised public spending from about 38% of GDP when he took office to 46% of GDP today.

In fairness to Spain, the big run-up in spending wasn’t due to a big run-up in poorly thought out handouts: The country moved enthusiastically – perhaps too much so – into the green-technology sector, to the point where an all-too-familiar boom-and-bust scenario played out.

Like the United States, Spain is stuck with its left-leaning administration until 2012 (both have four-year electoral cycles; Spain’s is seven months earlier). However, it has one enormous advantage over the United States – a savings ratio (personal savings as a percentage of disposable income) that stood at an extraordinary 24.7% in the 2009 fourth quarter, compared with a mere 2.7% in the latest month here in the United States.

Admittedly, Spain’s saving is highly cyclical, so the annual average is only about 20%. Nevertheless, the much-higher level of domestic saving suggests Spain should be able to finance its budget deficit domestically much more easily than will the United States.

With public debt also lower than in the United States – let alone in Greece – Spain’s position is thus fundamentally sounder. It should be relatively easily able to navigate the current storm and ride out the current government’s spendthrift tendencies – giving the voters the chance to put a more-fiscally-appropriate government in place in the next election.

That being said, investors have to acknowledge that panic can trample logic. Indeed, as U.S. investors learned all too well back in 2008, in a market panic even well-run institutions can get into trouble (not that many of the Wall Street houses of that year were well-run, but a few were).

The same is true of countries, and Spain under Prime Minister Zapatero has weak-and-economically damaging leadership, which the voters are stuck with for another two years. Nevertheless, with its debt rating still a very respectable "AA," only the worst storm should cause Spain to take the same kind of crisis-spawned battering that Greece continues to face.

Source:  Gold News Wire

The government said over 400 flights would be canceled, leaving almost 40,000 people stuck in airports stretching from La Coruna in the northwest to Barcelona in the northeast.

Air traffic was expected to be affected until 2 a.m. (8:00 p.m. EDT Saturday) on Sunday morning, at which time flights would gradually resume. However, the government said there was a chance the cloud could still be affecting Spain next week.

"We don't rule it out and we will make alternative plans," Transport Minister Jose Blanco told a news conference.

He said extra places had been made available on long-distance trains, and extra buses and boats were being laid on to help people reach their destinations.

Transatlantic flights were being re-routed around the affected area, causing substantial delays.

Sweeping closures of European airspace last month disrupted the travel of millions of passengers in Europe and elsewhere, and cost airlines over a billion euros in revenues.

Scientific assessments led to a decision to restrict closures to areas of higher ash concentration, after lower concentrations were found not to be damaging aircraft engines.

The European air traffic agency Eurocontrol warned on Saturday of a rise in emissions from the volcano, Eyjafjallajokull.

"The area of potential ash contamination is expanding in particular between the ground and 20,000 feet," it said.

But fears that the ash would shut airspace over Portugal and southern France were not immediately borne out.

Authorities said problems could begin in France by Monday.

"Logically, we will be spared until Monday noon, based on current forecasts," a French aviation authority spokesman said.
 

Souce:  Reuters

The downgrading of Spain was done for strange reasons. Spain's has a debt to GDP of 90% (against 144% of for Greece) and a budget deficit of 7% (against Greece's 14%). More importantly, the spread over German bunds is 250 bps against 700bps. With an AA rating (compared to Greece's BB), even after the recent downgrading from AAA, Spanish creditworthiness is strong.

We are living in a strange world where everything that is said can be published and then becomes a self-fulfilling prophecy. The role of the media is important, but also the way the authorities communicate is critical.

Jose Luis Rodriguez Zapatero and his Government need to stick to the facts rather than threatening the rating agencies or the markets. I happened to be in Madrid last week on the day Spain was downgraded. It was portrayed by as a catastrophic situation. Now is not the time for over dramatization and the endless shows of the European leaders give more an impression of confusion than leadership.

Whoever launched the rumor of a $ 350 billion IMF financing for Spain that made the markets immediately tumble must be the same people who spread rumors to cover their short positions. Unfortunately short sales in fixed income are neither well regulated nor monitored. This was insane. But the fact that the market believed the rumor for a few hours is in itself a sign of its lack of knowledge.

The Spanish problem is totally different from that of Greece and these two should not be confused in the market. The Zapatero Government has been slow to act forcefully to the problems in the "cajas de ahorros." These savings banks are mostly providers of mortgages and many are close to collapse and will only survive through consolidation. Local politics have delayed some of those transactions and the Spanish Government has not acted as decisively as it should have. Yet this is ultimately more of a private sector problem, since those cajas heavily borrowed abroad benefitting (until now) of the public sector 's AAA rating.

The largest Spanish banks, especially Bilbao Vizcaya and Santander had limited exposure to the subprime markets and are perfectly capable of weathering the storm of the real estate market collapse in Spain.

Contagion should only happen when there is an immediate connection between the issuers. While they share the commonality of the Euro, and therefore the slow growth in 2010, the decrease of the value of the European currency is also benefitting to them. Beyond that the situation of each individual country is specific and amalgamation makes no sense.

The amalgamation could provoke contagion, but it definitely does not need to be the case.

Source:  Huffington Post