Thank you very much, and good morning to everyone. It is truly a pleasure to be here with you all.
The title I have given my presentation is “A medium-term view of the Spanish economy and the Spanish financial system”. What I want to highlight is precisely the need to have a medium-term perspective and analysis. The European political and economic climate leads us to think in the very short term. It leads us to think about Greece, the upcoming elections, and the Royal Decree-Law that will be approved this Friday, so it is important that we also engage in this kind of more strategic reflection and that we are able to place ourselves, both in the sphere of the economy and in society more broadly, in a medium-term context. This is about reflecting on structural elements, rather than cyclical factors, and this approach can be truly important in order to continue the successful process of economic recovery. I have divided my remarks into two blocks: one on the economic situation and another on the Spanish financial system. The two are interconnected, since in the end the financial system is nothing more than a reflection of what happens in the real economy, of what happens to households and businesses.
Starting with the Spanish economy, the first reflection I would propose is what we can aspire to in post-crisis Spain. It is important to make this reflection because, based on our own experience, many of us lack a reference model. If we think about it carefully, most of the professional careers of many of us have unfolded under situations we could describe as abnormal: one of irrational exuberance, the boom, and another of a crisis that none of us thought would be as harsh and as intense as it ultimately was. In short, these are 15 years, from 2000 to 2015, in which we have not experienced a situation of normality, and it is clear that we are emerging from the crisis—there is no doubt about that—and now we must ask ourselves what steady state we should aspire to. The obvious answer to that question—though it has not fully taken hold here—is that a return to the bubble economy is neither possible nor desirable. We cannot and should not think that emerging from the crisis will take us back to the exuberance we experienced during the years of economic expansion, as intense as it was unbalanced.
The crisis can be explained in many ways. My favourite way to explain what happened to us is that we confused wealth with indebtedness, and that is no small mistake, because they are two opposing concepts. There is no possible confusion when this happens to businesses and households but, as a society, it seemed to us that this period in which the Spanish economy was taking on debt so intensely was a period of wealth. A financial mirage took hold across society, in which we confused assets and liabilities, the two sides of the balance sheet. The two most obvious symptoms of that confusion were the current account deficit and the increase in external indebtedness—two very serious imbalances which, while the former has been corrected, and very sharply, the latter is still pending correction and we will probably need decades to achieve it.
The lessons we have learned from that situation are clear, and the educational effort we need to make is important. One of them concerns the growth of our economy. We have learned that growth must be strong, but it cannot be so high as to generate a current account deficit. Ultimately, a current account deficit entails an increase in external indebtedness, so if we want to reduce our debt to the rest of the world, we will have to achieve current account surpluses. If growth is very high with very buoyant domestic demand, in the end that demand will drive imports and cause an external imbalance that we cannot afford. In the short term, the price of oil helps, but we cannot count on that improvement as a structural element in the medium and long term; we need once again to reduce external indebtedness and, to do so, we need high growth figures, but not as high as those we experienced during the bubble period, because that leads to an external imbalance that is very difficult to correct.
Another lesson that can be drawn from the crisis concerns employment. The jobs lost are, without a doubt, recoverable in the long term, but those workers with low-skills, if you will allow me to use the English term, will have lower wages, and that will be impossible to avoid. If we want to create quality employment, we will have to improve workers’ training. There is no other option.
What can be said about profits? Corporate profits will probably not be what they once were and, moreover, they will have to be used to reduce companies’ indebtedness and improve their solvency. We all know that the Spanish economy is characterised by a strong presence of SMEs, but Spanish small and medium-sized enterprises are particularly undercapitalised when their situation is compared with that of other countries, such as Germany, for example. Therefore, companies will generate profits again, but their primary purpose will be, as it should be, to strengthen corporate balance sheets, rather than distributing them in the form of dividends.
In short, what I mean by all this is that, indeed, we have completed the marathon, but what we thought was a marathon has turned out to be the Ironman: now we have to get on the bike and ride 200 kilometres over the coming years. Therefore, we must explain to society that now we have to keep pedalling, because what matters is sustaining that effort in the medium and long term to correct the imbalances. Part of that educational effort involves establishing a culture of stability. Exaggerating, the choice would be between the model of Germany or that of Venezuela. I will not dwell on the advantages of being Venezuela, but allow me to insist on the advantages of being a little more like the Germans, when one sees what has happened in Germany during the crisis.
For example, the fact that in Germany employment fell less than GDP. I wonder why this happened. It is clear that the German worker is highly skilled and companies were interested in keeping those highly productive, well-trained workers and not laying them off, so as not to have to face the challenge of retraining new hires when the recovery came. For that reason, employment fell less than GDP, whereas in Spain it was the exact opposite: job destruction was far greater than the contraction in GDP. In addition, Germany has sound public finances and modest living standards, but without major shocks. In short, one can live better with growth of around 2% or 2.5% than on a roller coaster like the one we have experienced over the last 15 years in Spain, where we were the economic miracle, then the economic catastrophe, and now it seems we are once again the economic miracle—let us hope that this time it is more sustainable over time.
I reiterate that it is necessary to establish a culture of stability. We can already observe elements in which that culture is being reflected, even though it is very difficult to establish. We have just begun negotiations for the banking collective agreement, from which the wage review clauses based on the CPI have disappeared. This shows that we have already assumed that this is a country with price stability and, therefore, a country in which this type of CPI-linked review clause is no longer needed. In other words, it seems there are elements of progress in that culture of stability.
Nevertheless, it is necessary for the public sector to encourage these behaviours. For example, long-term saving should be incentivised and consumption relatively penalised through the tax system. But it is still striking that an economy like ours, which so strongly needs to encourage long-term saving, is currently doing exactly the opposite: discouraging saving and favouring consumption. Current interest rate levels are doing precisely that, but so are political decisions such as the recent reform of contributions to pension funds. This strategy could be understood in the European context, where a boost to domestic demand is needed in the short term, but in the medium term this situation is not sustainable either in Europe or in Spain. But at the very least, Spain would have to find a way to encourage long-term saving, because a great deal depends on it.
The second element for reflection, closely related to the previous one, is the external imbalance—flows and stock. The current account deficit, which stood at around 10% of GDP, has been corrected in a spectacular way, partly as a result of the recession itself. The collapse in domestic demand has favoured external rebalancing, but genuine competitiveness gains have also occurred, indicating that the internal devaluation process launched in recent years has worked. The Spanish economy is gaining market share in the European Union, where the exchange rate plays no role and where demand is not exactly at its best, and it is doing so in particular in the Eurozone. But when we talk about the current account, we sometimes forget that it is a flow, which fortunately has been corrected very quickly, although the stock problem—external indebtedness, or rather the net international investment position—remains.
The figure for our external debt is very high in any international comparison, although part of that data reflects Spain’s investments abroad, which are proving very profitable. Nevertheless, external indebtedness poses the challenge of accumulating current account surplus positions (or, in national accounting terms, increasing the nation’s net lending capacity) over a prolonged period of time in order to reduce that external indebtedness. Until that happens, Spain will have a very serious problem of financial fragility, since the time needed to reduce external indebtedness is far longer than the average financing period of that external debt, which will have to be refinanced several times over the next decade. This is an unavoidable fact, so any element of uncertainty—any political or economic shock, domestic or global—could bring serious difficulties in successfully carrying out those refinancing processes. Problems that may arise in the form of a higher cost—a higher risk premium—but could also appear as a sudden stop, because markets suddenly do not offer the financing that is needed. That is, a quantity constraint which, if you recall, was an anathema before the crisis. Before, prices always adjusted so that supply and demand matched. But, as we have already experienced several times during the crisis, it is no longer a question of price, but simply that markets close.
In summary, the financial fragility of the Spanish economy will be greater the slower the reduction in external indebtedness. Therefore, it is crucial that over the next four years we are able to put external indebtedness on a downward path in order to generate the right expectations in the market.
Let us now look at the role of the banking sector in all this. During the bubble period, the private sector took on debt and the banking sector acted as an intermediary between the private sector and the external sector; that is, external indebtedness was channelled through banking institutions. During the crisis, a major shock occurred that affected financial institutions in particular, because they were the ones with the capacity to obtain international financing in large amounts. Now the situation is different: the private sector has reduced its level of indebtedness and is on a reasonable path of reduction. The public sector, however, has replaced the private sector in terms of its external indebtedness position. Therefore, the refinancing tensions I referred to earlier would probably be reflected more in the sovereign debt market than in the bank funding market or corporate financing. In any case, there is no need to dramatise excessively. Sovereign debt markets are going through an excellent period. But the message is that we must not be complacent: markets, as we have already seen, can be very complicated and can turn very quickly.
Let us also look at what has happened in the financial system. The first reflection concerns the European Commission’s project to create the Capital Markets Union. As we all know, the weight of the banking sector in the United States is much lower than in Europe. Around 25% of the financing of the productive economy in the United States depends on banks and 75% of financing is obtained via markets. However, if we included Fannie Mae and Freddie Mac, which are the major securitisers of mortgage risk generated by bank lending, the figure for market-based financing would be somewhat lower. In Europe we are in the opposite situation: 75% of the economy’s financing comes from banks and around 25% from the market.
The Spanish economy is even more dependent on bank credit, with 90% of financing provided by banks. Before the crisis, these differences between the United States and Europe were little more than an anecdote, but the crisis has shown that excessive dependence on the banking sector is not advisable, given the financial fragility of banks by definition. Banks are very peculiar institutions: they finance long-term credit with shorter-term liabilities, and they do so in a leveraged manner. They are very important institutions, because they are the only ones capable of carrying out that maturity transformation efficiently, but also with that fundamental imbalance that makes them particularly fragile. In short, a systemic banking crisis implies putting the financing of the economy as a whole at risk. Consequently, it seemed necessary to rebalance the situation by promoting in Europe, and particularly in Spain, a greater role for markets to the detriment of the banking sector, which is what the Capital Markets Union proposes. Overall, it seems a good proposal, although it is probably not necessary to reach the percentages of the United States. A situation in which 50% of the economy’s financing came from markets and the other 50% from banks would be reasonable. That said, it is necessary to analyse the problems surrounding this plan which, as I have said, is conceptually correct.
José María Roldán, Chairman of the Spanish Banking Association
