Spain¶s Financial Crisis & Economic and Funding Strategy 2010

Group 11

Agenda
Spanish Economy before the crisis The Great Spanish Real Estate Bubble Economic Strategy Structural Reforms Fiscal Consolidation Strategy Funding Strategy

Spanish Economy before the crisis
Spain economic growth continued during the term of Prime Minister José Luis Rodríguez Zapatero (2004) The new government continued with liberalization, privatization, and deregulation of the economy The GDP growth was robust at around 3% (European standards.) However signs of a problem had started surfacing. Unemployment levels, although down from the highs of 1990s, were still at around 10%. The inflation rates were going high and there was an increasing family indebtness at as much as 115% on account of rising real estate and oil prices. The yawning Trade and Fiscal deficit was another matter of concern.

The Great Spanish Real Estate Bubble
Spain witnessed a real estate boom starting late 90s.
The property prices increased by over 80% between 1990 & 2007. Much of the boom was fuelled by low interest rates and easy availability of credit. The average Spaniard s desire of owing a house was the underlying driver of this phenomenon with active government encouragement.

The Real Estate sector soon came to become one of the most important sectors in the Spanish economy, generating employment and causing influx of migrant laborers. Post the worldwide economic meltdown of 2007, the Real Estate boom collapsed.
In the period 2007-2008 Spain became the worst effected country in terms of the sharp plunge in construction sales. Actual sales went down by 25%, causing the new constructions to come to a standstill. This further aggravated the Unemployment problem which rose dramatically to 21% while the rest of Europe was at 9.6%.

And the burst !
Post the worldwide economic meltdown of 2007, the Real Estate boom collapsed.
In the period 2007-2008 Spain became the worst effected country in terms of the sharp plunge in construction sales. Actual sales went down by 25%, causing the new constructions to come to a standstill. This further aggravated

High rates of Unemployment
The Unemployment problem which rose dramatically to 21% while the rest of Europe was at 9.6%.

Creating new jobs incredibly difficult
Confronted with wage demands which are unfit for the less modern economy. Forced to cut jobs in order to compete, because it cannot devalue its currency. It is running out of space to create greater productivity

GDP - real growth rate 2% (2008) 7% (2007) 9% (2006)

Spain today..
Over 20% of the workforce is unemployed Deficit equal to 11.4 percent of GDP Total debt equals 270 percent of GDP Rampant credit downgrades Unsold housing inventory levels SIX TIMES WORSE than America A "green economy" that strangles two jobs for every one it creates Caught between austere misery and a credit downgrade IMF forecasts NO POSITIVE GROWTH until 2011 The strikes and protests are just getting started

With the amount of funding Spain requires, there's no way the current eurozone bailout could meet Spain's needs if things got worse.

Catch 22
Caught between austere misery and a credit downgrade
A Loose Loose situation What ever you do will harm the economy Onourous debt levels difficult to be serviced Cut the government expenditure and you devastate the Economy Keep the same level of expenditure, you end up going the Greece way

Banks at a glance..

What does it mean to Europe?
EUR Millions Spain Germany France United Kingdom Belgium Netherlands Italy Ireland Portugal Austria Exposure to Spain 203,310 31,854 6,592 5,916 3,530 1,685 1,383 391 345 239 Exposure/ Tier 1 Capital 113% 21% 4% 2% 11% 2% 2% 2% 2% 1% Barclays, Deutsche Bank, and BNP has large estimated exposures to Spanish sovereign debt.

Is Spain a dead Economy walking?

Is Spain the Iceberg all set to sink the Titanic that is Europe ?

Government¶s Macroeconomic Plan
The output gap to be closed by 2013, after peaking in 2010 External demand contribution to GDP will gradually wane as domestic demand would begin to gather steam Potential growth must recover from a trough of 0.6% in 2010 to 1.6% in 2013

Economic policy strategy for sustainable growth
Prudent Macroeconomic Scenario 20102013 Agreement on Fiscal Consolidation to bring the deficit back to 3% in 2013 Structural Reforms: Structural Reforms in the goods markets Public Pensions System Residential Real Estate Sector Labour Market Banking sector Restructuring

Fiscal Consolidation Strategy
Substantial reduction in Spending and moderate increase in Revenues Already in 2010 a 2.2% cut in structural deficit Temporary measures (changes in tax collection, one off investment funds) account for 2.4% points of GDP in 2009 s total deficit Total size of fiscal policy adjustment (structural terms): 5.7% of GDP Restraint in wage outlays for all public administrations through: 10% replacement rate No new temporary hiring Strong moderation in wages Sizeable cuts in investment, transfers and subsidies Shared commitment to fiscal discipline and margin to secure further reductions in the deficit

Highlights of Funding Strategy
Significant reduction in net funding requirements and persistence of sound risk metrics Liquidity, transparency and predictability will continue as guiding principles for the execution of our auction program As for syndications, timing is dictated by the limit size of the line to be replaced (16.5 bn for longer tenors) and market conditions Innovations for 2010: 18-month T-bills reappear, Euro inflation linker still a project Maintain a stable and diversified investor base

Thank You
Group 11 Sandeep Deb Purnendu Singh Tulika Dhawan Rahul Malik Vijit

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