Brussels and ECB Call for “More Progress” on Fiscal Adjustment

The European Commission and the European Central Bank (ECB) ruled last week that the financial reforms undertaken by Spain in exchange for the 40,000 billion euros bailout granted by the Eurogroup are maintaining a “good pace”, but have called on the Government for “more progress” on fiscal consolidation and structural reforms to consolidate the stabilisation of the economy. In addition, the Spanish Government must exercise extreme vigilance on banks that have received European public aid to ensure they meet the restructuring plans agreed with Brussels and to guarantee a “solid” and “credible” business plan for the bad bank (Sareb) which manages toxic real estate assets.

These are the conclusions of the troika inspectors – formed by the Commission, the ECB and the International Monetary Fund – who visited Madrid from 28th January to 1st February to verify, for the second time, if Spain is fulfilling the conditions set out in the bank bailout memorandum. “The successful conclusion of the second review mission to Spain shows that the repair and reform of the Spanish financial sector maintains a good pace,” concluded the Vice President of the Commission responsible for Economic Affairs, Olli Rehn.

“The welcome drop in funding costs of sovereign debt in recent months – continued Rehn – reflects the growing confidence of investors in the measures taken in Spain and the eurozone to address both the symptoms and the causes of the crisis.” “To take advantage of these important developments and ensure that these benefits reach the real economy, it is essential that Spain maintains its attention both on sound public finances and on the determined implementation of economic reforms,” Rehn highlighted.

In this regard, Diario Sur reported that the troika inspectors warned that “the economic situation remains difficult, with a very high, and growing, level of unemployment, contraction of GDP and the necessity to reduce large stocks of domestic and foreign debt.” Therefore, the inspectors also stressed that “more progress is still needed in the consolidation of public finances – including the strengthening of the institutional framework – and the quick completion and implementation of the structural reform agenda.”

Significant Challenges in the Banking Sector

Access to the markets by the State and Spanish companies has improved in recent months and foreign investors have returned to the Spanish markets. The result, noted the troika, is that the debt interests have fallen ‘significantly’ and “the Spanish banking sector liquidity constraints have been eased.” “Despite these positive developments, vigilance must be exercised to ensure that these positive trends are maintained,” warned the report. “Persistent efforts are needed to overcome the significant challenges facing the weakest parts of the banking sector, which justifies forceful policy action,” they added.

Specifically, the report stresses that “it is very important to fully implement the agreed restructuring plans for the banks that have received State aid in order to facilitate the adjustment of the whole banking sector.” “The Spanish authorities must be vigilant in monitoring and overseeing this process and ensure that they maintain the right level of burden-sharing predicted between investors in risk instruments and taxpayers,” said the troika in reference to tax deductions which should apply to the holders of preference shares.

Transfer of Assets

The inspectors praised the “significant progress” made in the transfer of real estate assets of banks with aid to Sareb. “The Spanish authorities have successfully designed, implemented and made this entity operational on time,” said the report. However, the report notes that “much work remains to be done” to ensure the proper functioning of the Sareb. “A solid business plan is the foundation on which to base the success of Sareb, as it is very important that this plan remains robust and credible, based on current information,” the report noted.

Finally, the troika inspectors also praised the “important advances” achieved in the reform of the savings banks’ law, the review of the monitoring procedures of the Bank of Spain and the changes in the regulatory framework for credit concentration and provisions, as well the reinforcement of the credit register. These reforms are “essential steps” towards achieving “the responsible and healthy financial sector that Spain needs to ensure access to credit for households and businesses. This process must be completed on time and strictly applied,” said the Commission’s Vice President for Economic Affairs. The troika inspectors will return to Madrid in May 2013 for their next evaluation.