Spain's Secretary of State for the Economy
Moody’s Investors Service may cut Spain’s credit rating as much as two levels.
The rating agency is currently reviewing Spain’s AAA foreign and local currency sovereign bond ratings.
Spain continues to face fiscal challenges and falling growth expectations.
Jose Manuel Campa, Spanish Deputy Minister of Finance sat down with Maria Bartiromo before the Moody’s news came out.
Macro Versus Micro
Campa admits, from a macro point of view the overall economy is not growing. There seems to be a negative growth forecast for the year. However, on micro level, there is definitely a lot of restructuring in different sectors; particularly real estate. Slow and steady recovery can be seen in these sectors.
The Man With “The Plan”
Campa has a three-part plan to help Spain get out of debt and implement long-term change.
Step One: Create a stable and credible fiscal framework for the country. There have been issues over the last five weeks about the credibility of Spain’s fiscal convergence program. Spain has committed to a 3% deficit by 2013 within the stability and growth program of the European Union.
Step Two: Get the reforms in place, sets up the foundation for growth going forward. The re-adjustment of the economy goes towards more productive activities, and long-term productivity in the housing activities. Campa tells us that this is already happening. Spain has a large unemployment population and the country has already passed labor reforms as well as reforms on the product market to try to liberalize the sectors in the service industry.
Step Three: Fix the financial sector, get the credibility back into this industry.
When asked about risks of default, Campa “would say it’s nil.” Campa explained that Spain has a low debt to GDP ratio, and a large deficit of 11.2%. Given the context of other global economies, this is not exceptional since similar deficits can be see in other countries. Campa forecasts the Spanish debt to GDP ratio will go up to 72% in 2013. The current European average is 74.9%.
“I don't think anybody doubts the solvency of the public sector. Even when you look at the rating agencies with the concern about this, the long-term debt dynamics in growth is about to pick up. And the other form of the financial system is able to channel credit growth to the economy,” said Campa. This is where the structural reforms and the reforms of the financial system will be able to channel credit growth to the economy.
Spain is expecting small positive growth within the next year, and rise to about 2.7% by 2013.
Stress Testing Spanish Banks
The European Union and European Central Bank are turning up the heat on countries to increase the numbers of banks to be stress-tested. Many of Spain’s 45 banks are expected to be tested. Campa does not expect any dramatic results. However, Campa believes that it is still important to put them forward, as well as to understand that there are particular institutions that may have issues of lack of capital, that they have the means to find that capital.
Spain has announced a fiscal consolidation plan that will help the country fulfill its 3% or less deficit commitment to the European Union. This involves getting from an 11.2 percent deficit in 2009 to a deficit of 6 percentage points of GDP in 2011.
Difficult measures have been taken to achieve this. Government employees' wages were capped by 5 percent, an average, with freeze pensions for next year. Some early retirement schemes that allow some workers to retire earlier, were taken away, which was a burden, obviously, on Spain’s fiscal accounts. Campa is convinced Spain will get back on track if the country sticks to the plan and exercise fiscal discipline.
Communicating The Message
With all the cuts that are in discussion, and lack of jobs, riots and public outrage are to be expected. To prevent this from getting too out of hand, it is important to communicate with the public. Campa continues to bring his case to the public by explaining the measures the country is taking, why the country needs it and how they will build on the future. In the end, Campa thinks that Spain will be okay.
Crystal Lau contributed to this article.
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