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14th August Spain taking steps to shore up economy.
Spain's cabinet ministers interrupted their annual holidays on Thursday to approve a fresh package of 24 measures aimed at reviving a rapidly deteriorating economy as official data showed growth all but stalled in the second quarter.
"The government is working to make sure that the economy recovers as soon as possible," Prime Minister Jose Luis Rodriguez Zapatero, wearing a dark suit and black tie, told reporters after the measures were approved at the meeting.
The government normally has no cabinet meetings during August when most Spaniards traditionally take their summer holidays.
Among the measures approved by the socialist government is the simplification of environmental plans for public works, the abolition of the wealth tax and cutting red tape for small and medium-sized businesses.
Zapatero said environmental assessments of public works projects will now take a maximum of six months to be carried out compared to an average of 770 days. There are over 3,000 projects awaiting an assessment, he added.
Spain has until recently had one of the world's fastest growing developed economies, posting an expansion of 3.8 percent last year.
But its economy, the fourth-biggest in the eurozone, has been slowing down as the impact of an abrupt end of a decade-long property boom, due to rising interest rates and the international credit crunch, spreads to other sectors.
Output expanded 0.1 percent from 0.3 percent in the previous three months as domestic consumption weakened further, according to preliminary figures released earlier Thursday by national statistics office INE.
On a 12-month comparison, gross domestic product (GDP) grew by 1.8 percent in the three months to June after 2.7 percent in the first quarter of 2008, its lowest level in over a decade.
The country is especially vulnerable to higher borrowing costs because the vast majority of mortgages have variable interest rates and the property sector accounts for a much larger share of the economy then in the rest of Europe.
The European Central Bank has raised the base rate nine times since December 2005.
Zapatero stressed that the Spanish economy, while struggling, was still outperforming its European peers.
The eurozone's three largest economies -- Germany, France and Italy -- all contracted in the second quarter.
The eurozone economy contracted for the first time ever in the second quarter, with output falling 0.2 percent, the European Union's statistics office Eurostat said earlier Thursday.
The Spanish government's new measures are in addition to an 18-billion-euro spending plan announced in April, which includes income tax rebates and funding for public works, aimed at reviving the economy.
The government hopes the measures will bring economic growth back to around 3.0 percent in 2010.
But the conservative opposition and media have accused Zapatero, who was re-elected to a second term in March, of being too slow to take action on the economy.
"Another smokescreen against the crisis," right-wing daily wrote in the headline to its lead editorial which dismissed the government's extraordinary cabinet meeting as a publicity stunt.
Last month the government slashed its economic growth forecast for this year and the next from 2.3 percent to 1.6 percent in 2008 and 1.0 percent in 2009.
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August 13th - Morgan Stanley Issues alerts alert on Spanish banks
Morgan Stanley, the investment bank, has issued a major alert on the health of Spanish banks, warning that a replay of the ERM crisis in the early 1990s could wipe out the capital base of weak lenders exposed to the property crash.
"A momentous economic slowdown is now under way. We believe the deterioration in Spain is just in the beginning stages. The bulk of the pain will be suffered in 2009," said the report, by Eva Hernandez and Carlos Caceres. "The probability of a crisis scenario similar to the early 1990s is increasing. If the ERM (Exchange Rate Mechanism) scenario were to become reality the main concern would not be earnings, but capital," it said.
"We estimate that a non-performing loan ratio of 10pc to 15pc for developers' loans would fully erase earnings in 2009 and would represent between 20pc to 30pc of the current tangible capital base of Banco Popular, Sabadell and Banesto," they said.
The grim report comes amid a fresh flurry of horrendous data from Spain. The ICO consumer confidence index has plunged to a record low of 46.3. Lay-offs continued to surge in July as the building industry - 13pc of Spain's workforce - stepped up its job purge. Unemployment has risen by 457,000 over the last year, pushing the rate to 10.4pc. "These figures are very disturbing", said employment chief Maravillas Rojo.
Finance minister Pedro Solbes told El Pais that the outlook had darkened dramatically over recent weeks as the global oil shock and rising interest rates combined with Spain's home-grown housing crisis. "The economic situation is worse than we all predicted. We thought it would happen slowly but instead it has hit fast," he said. Mr Solbes admitted that the property boom had degenerated into a "bubble" but said there was little the government could reasonably do about it. "What was the state supposed to do? Stop people building houses? That wouldn't be reasonable. Tell the banks who they can lend money too? We couldn't do that either. We warned that building 800,000 homes a year was not sustainable: and that granting mortgages for 40 years was folly, but there are certain things the government cannot prohibit," he said.
The root cause of the bubble was the extremely lax monetary policy imported by Spain after it joined Europe's monetary union. Interest rates were slashed on EMU entry, and then fell to 2pc until late 2005 - far below Spain's inflation rate. However, Mr Solbes has been reluctant to link the crisis to Spain's euro membership. As Europe's economics commissioner at the launch of the euro, his career is inextricably tied up with the whole EMU experiment.
For now, smaller Spanish banks are getting by on funding from the European Central Bank, in many cases issuing mortgage bonds with the express purpose of using them to secure loans from Frankfurt. ECB loans have tripled to €47bn over the last year, causing rumblings of concern among regulators. The ECB is not allowed to prop up banks with long-term funding under EU treaty law.
Morgan Stanley said there was 40pc chance of a "bear scenario" leading to a 0.5pc contraction of the Spanish economy next year, with a mounting risk of an even more extreme case that replicates the ERM crisis (or worse) and leads to a 1.4pc contraction in 2009.
The report said construction investment made up 18pc of GDP last year, much of it funded by foreign investors. The concern is that a "sudden reversal of capital inflows" could leave the economy unable to finance its current account deficit, now 10pc of GDP - the world's second biggest after the US in absolute terms. The corporate sector has debts equal to 130pc of GDP. This too requires foreign funding.
Morgan Stanley said it had become concerned about the banks after the €5.1bn (£4bn) collapse of Martinsa-Fadesa, the country's biggest builder. Loans to developers make up 26.1pc of total lending for Sabadell, 21.9pc for Banesto, and 19.4pc for Popular.
This leaves them highly vulnerable to an ERM-style bust that could push non-performing loans for developers to 14pc. "Such a scenario cannot be disregarded, in our view," it said, adding that the developers may face an even more drastic challenge than they did in the early 1990s.
The "extreme bear" case would lead to further dramatic falls in bank shares: Banco Popular (-61pc), Sabadell (-56pc), Bankinter (-51pc), Banesto (-42pc), and BBVA (-35pc). The report based its estimates on a stress test that replicates what happened in Britain in the early 1990s, as well as Spain's own travails during that period. It said BBVA enjoys a solid client base and is likely to be a "winner" once the storm passes.
The condition of Spain's lenders is a source of intense controversy, and the Spanish officials bridle at claims by foreign critics that there is any problem. The banks certainly dodged the US sub-prime debacle, thanks to restrictions by Bank of Spain on the use of off-books investment vehicles. Home equity withdrawals and "piggy back loans" are rare. Mortgages were mostly limited to 80pc of house prices, at least in theory. The great unknown is whether those price estimates bear much resemblance to reality. Ramon Lobo, a former bank auditor, said valuations were routinely inflated by as much as 25pc, allowing the sub-prime-style abuses through the back door. The Bank of Spain denounced the use of inflated appraisals in 2006.
If the practice was as widespread as feared, the default rate on €320bn of Spanish mortgage paper sold to investors worldwide could prove higher than expected.
Spanish house sales fell 34pc in May from a year earlier, and mortgages were down 40pc. The consultancy Facilismio said yesterday that prices had fallen 6.7pc in July from a year earlier, but anecdotal reports suggest a much steeper drop. With gallows humour, Spanish journalists have begun using the term "Costa del Crash". The UK estate agent Savills said Britons are having to accept price cuts of 20pc to 30pc if they need to sell their villas in a hurry.
The vultures are starting to circle around the hapless Mr Solbes. Critics are calling for his head, accusing him of covering up the true scale of the downturn before the re-election of the Socialists in March. This seems unfair. Mr Solbes continued to dismiss warnings of a crisis as "enormously exaggerated" long afterwards. He appears to be genuinely astounded by what has occurred.
Full story from www.telegraph.co.uk
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