A report released on Tuesday by the European Commission (EC) and the European Central Bank (ECB) indicates that Spain’s economic outlook is “favorable” despite some existing “vulnerabilities.” The report highlights ongoing improvements in public finances and the banking sector, which is described as “profitable” and “resilient to risks.”
After Spain makes its next scheduled payment of 4.6 billion euros in December, it will have repaid over 75% of the 41.333 billion euros received in 2012 and 2013 to restructure its banking sector. This progress will enable Spain to conclude the semi-annual evaluations by European institutions regarding its economic and financial status.
This exit from surveillance is occurring sooner than anticipated, as Spain has made several voluntary repayments in recent years to expedite its return, which is expected to be completed by 2027.
Strong Growth
The EC and ECB’s report acknowledges a favorable economic outlook but cautions about vulnerabilities such as geopolitical tensions, low productivity growth, rising labor costs, and housing supply bottlenecks.
They note that public finances are “continuing to improve,” with the deficit projected to decrease to 3.2% of GDP in 2024, despite costs associated with recent flooding and increased debt reaching 101.6% of GDP. This improvement is attributed to “strong economic growth,” higher tax revenues, and the gradual removal of energy subsidies.
These circumstances enhance Spain’s ability to manage its public debt effectively, with institutions considering the financing conditions of the central government to be “favorable.” The declining risk premium (the differential with German bonds) reflects “continued market confidence in Spain.”
However, they caution that the rising cost of existing debt, albeit from low levels and slowly, combined with the high public debt ratio, necessitates “close attention.”
Financial Sector
The financial sector is noted for its profitability and risk resilience, though the capitalization of Spanish banks has only marginally improved. This is attributed to the banks’ preference for substantial dividend payments and share buybacks, with the CET1 maximum quality capital ratio (13.6%) being the lowest in the EU, despite fulfilling European standards.
The risks to financial stability are deemed “contained,” primarily linked to global geopolitical tensions, weak economic growth, and currency depreciation in key foreign markets like Latin America. Internally, recent increases in housing prices, new mortgages, and loan-to-value ratios indicate that “greater vigilance” may be warranted.
Alongside Spain, Greece, Portugal, Ireland, and Cyprus are also under this form of post-rescue surveillance until they repay at least 75% of their respective aid packages, which, unlike Spain’s, were not confined to banking. (November 25)
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