Mr. Chairman, Honorable Members,
I would like to begin my remarks by thanking you for requesting my presence before this Study Group on the reactivation of economic activity and employment in the current international financial crisis. It is a great honor for me, which also provides an opportunity to present the AEB’s opinion on the matter.
Allow me to remind you that the AEB comprises 61 Spanish banks and 36 branches of foreign banks. The AEB represents 56% of the average total assets of the Spanish banking system, 44% of loans (OSR), and 44% of customer deposits. As I did in my appearance before the Congress of Deputies’ Economy Committee on March 10, 2009, I must begin by expressing the firm commitment of each and every one of the banks I represent to fulfill our specific responsibilities to Spanish society and economy.
Overcoming the crisis requires a great collective effort, and banks, as we have done until now, will dedicate all our efforts to this task. Two extraordinarily important analyses of the Spanish economy have recently been published: first, the IMF report on the Article IV consultation for 2008; second, the European Commission’s spring projections. Both substantially agree in projecting a fall in Spanish GDP in 2009 between -3% (IMF) and -3.2% (EC). Both organizations also foresee that the Spanish economy will continue to contract in 2010: between -0.7% (IMF) or -1.0% (EC). Spain, according to both organizations, will therefore suffer a very severe recession in 2009, although somewhat less than that of the Eurozone. However, the Spanish recession will be harsher in 2010 than in neighboring countries, and probably more prolonged. Finally, it should be noted that the Bank of Spain’s own estimates are practically consistent with the above. This is the outlook before us. And, for this reason, the work of this Study Group is even more appreciated. The AEB’s position can be summarized in the following points:
1. The Spanish economic crisis has a dual cause. The first is internal and consists of the accumulation of imbalances during the long expansion phase that ended in 2007. The synthesis of all these imbalances is reflected in our economy’s high need for external financing and its high level of international debt. The second cause is external and increasingly acute. Initially, it manifested as a financial crisis that closed liquidity and credit markets where the Spanish economy was financed through its banking system. Subsequently, the financial crisis has caused a global economic recession that depresses our exports and undermines expectations and confidence levels.
2. For both reasons, Spain suffers from and participates in the real economic recession and endures the effects of the international financial crisis. However, our banking system has neither collapsed, as has occurred in other countries, nor does it need to change its business model, as many of our competitors will have to. The recent IMF report of April 2009 clearly states that “the banking sector has weathered the initial impact of the global crisis well thanks to prudent regulation, solid supervision, and an equally cautious and prudent retail business model.” However, the banking sector now has to face the recession of the Spanish economy and the continued closure of the
3. international markets. In particular, the three main challenges for the banking sector are, according to the IMF: The decline in the housing sector. Rising unemployment. Difficulty in financing. The first two correspond to the internal cause of our crisis. The third to its external cause.
To address this situation, Spain has several assets, of which I will highlight three:
– The Spanish banking system remains sound. Other countries are striving to repair or rebuild their systems. In our case, our primary function and objective is to preserve, strengthen, and improve the banking system.
– The financial situation of the Public Sector. With a surplus of 2.2% of GDP and public debt of 36.2%, the starting situation in 2007 was certainly healthy. However, the situation has rapidly reversed. The deficit in 2008 reached -3.8%, and the EC’s projection for 2009 is -8.6%. It is striking not only the speed of the change but also that a fiscal impulse of almost 11 percentage points of GDP does not more effectively curb the strong economic slowdown. Under these conditions, as the Bank of Spain points out, the fiscal path is practically exhausted. If used, it must be done with enormous caution to avoid generating greater distrust and uncertainty. Therefore, it would be preferable to act on the composition of public expenditures and revenues rather than on the magnitude of the deficit.
4.- Membership in the Economic and Monetary Union is possibly our greatest asset, especially in turbulent times like these. It is true that it deprives us of exchange rate policy and monetary policy, but it offers us the refuge of a highly stable and trustworthy currency that anchors expectations and economic policy options. Furthermore, as the economic cycles of Spain and the Eurozone are currently synchronized, the monetary policy of the European Central Bank, for the first time since its inception, is aligned with our internal needs. In this regard, the measures adopted by the ECB last Thursday, May 7, are to be welcomed. The ECB did not limit itself to lowering rates to 1% but additionally announced that it would extend its liquidity provision to banks to 12 months and that it intended to purchase up to 60 billion in covered bonds. These last two measures are unconventional and indicate that the ECB recognizes its responsibility in helping to restore and normalize financial and credit markets. It is true that the ECB cannot achieve this objective exclusively. Governments, in turn, must act to rescue and clean up their respective banking sectors, without which the impulses of monetary policy cannot be transmitted.
This is Spain’s comparative advantage. As I have pointed out, the Spanish banking system is fundamentally sound. This is recognized by both the International Monetary Fund and the Bank of Spain itself. But both organizations indicate that this does not mean it does not have to adapt to circumstances by restructuring and consolidating. The economic contraction in 2009 and 2010, the real estate adjustment, rising unemployment, and continued financing difficulties will force the banking sector to reduce its capacity and increase efficiency in the use of its human and capital resources.
5. The AEB welcomes the agreement reached by the Plenary of the Congress of Deputies on March 30, 2009, on this issue and considers the principles approved therein to be positive. I would like to particularly highlight three: total transparency of the process, minimization of cost to public coffers. Reject an indiscriminate recapitalization process for all Financial Institutions.
We therefore know what we have to do and how to do it. It is a matter of all of us getting to work. It is essential to act before the need to do so is perceived in the form of distrust and uncertainty. If public money must be used, let it be used to strengthen the banking system, not to save individual entities. No entity should be liquidated but rather leveraged to create another with greater potential for wealth and welfare creation.
Thank you very much for your attention. I am now at your disposal for any questions you may wish to ask.
