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International Financial crisis 2008 impact in Spain causes, responses, effects

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International Financial crisis 2008 impact in Spain causes, responses, effects

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Driven by a Real Estate price bubble and the lack of Monetary Policy, the Spanish Economy has suffered from the credith crunch one of the biggest recession in its history. Banking bailouts and savings banks resstructure and other government policies have stabilized the economy, but a strong dependance on a low interest rate can lead Spain to another crisis in 2019 if the European Central Bank follows as always the american trend of rising interest in a crowling manner by 2%. If you are in the brick industry again, and in Spain and have mortgage, start thinking now again about switching industry like I am doing and focusing on International business and exports. I hope to enlighten with this group project from the Darla Moore School of Business, at the top #1 International Business School of the USA, a broader point of view on global financial impacts of capital markets.

Driven by a Real Estate price bubble and the lack of Monetary Policy, the Spanish Economy has suffered from the credith crunch one of the biggest recession in its history. Banking bailouts and savings banks resstructure and other government policies have stabilized the economy, but a strong dependance on a low interest rate can lead Spain to another crisis in 2019 if the European Central Bank follows as always the american trend of rising interest in a crowling manner by 2%. If you are in the brick industry again, and in Spain and have mortgage, start thinking now again about switching industry like I am doing and focusing on International business and exports. I hope to enlighten with this group project from the Darla Moore School of Business, at the top #1 International Business School of the USA, a broader point of view on global financial impacts of capital markets.

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International Financial crisis 2008 impact in Spain causes, responses, effects

  1. 1. The Impact of International Financial Crisis 2008 on Spain Presentation by: Ø Puneet Kaur Ø John Black Ø Tze Chiao Ø Veronica Parellada Ø Pavel Korobov
  2. 2. ABOUT SPAIN Economy • Population: 48.9 Million • Unemployment: 14% • GDP(PPP): $1.77 trillion • GDP growth Rate: 3.1% Political • Government: Constitutional Monarchy • Legal System: Civil law • President: Pedro Sánchez Culture • Official Language: Castilian Spanish • Religion: 99% Roman Catholic
  3. 3. CAUSES OF THE CRISIS
  4. 4. MONETARY PRICING DEPENDED ON EUROPEAN CENTRAL BANK, NOT SPAIN • As a member of the Eurozone, Spain’s monetary policy is decided by the European Central Bank. As such, the interest rates leading up to the crisis were decided by the ECB, not Spain. • The global liberalization of the financial markets during the end for the 20th century led to faster movement of capitals between countries. Source: Political Geography Now website
  5. 5. EURO INTERBANK OFFERED RATE (EURIBOR) INCREASED, FOLLOWING THE INCREASE OF RATES OF THE FED RESERVE • Former US Fed. Reserve Chairman Alan Greenspan’s adopted low interest rates, as part of his free market policy. This led to over-lending in the US economy, which led the ECB to lower IR to compete in European markets. • When the rates increased first in the Fed Reserve, so followed the ECB and people and companies started to default mortgages and there was a credit crunch. 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 3,069 3,949 4,574 3,483 2,705 2,216 2,312 2,833 4,064 4,498 2,622 Source: Datosmacro.com
  6. 6. EVOLUTION OF SPANISH REAL ESTATE MARKET BUBBLE • The Real Estate market bubble grew. • It happened because there were weak regulations, and money was cheap to lend. Price per square meter evolution in euros (1985-2012)
  7. 7. THE COMMERCIAL AND SAVINGS BANKS WERE TOO WEAK, AND BOTH OF THESE SYSTEMS LENT TOO MUCH • Unlisted, regionally-based savings banks, known as cajas, accounted for around half the loans of the domestic banking system. • The removal of restrictions in 1989 enabled the cajas to expand around Spain. By 2008, there were 25,035, while there were 15,617 commercial banks that same year. • This means that there was about one branch for every 1,000 Spaniards -- twice the density of all other Eurozone countries.
  8. 8. EVOLUTION OF NUMBER OF MORTGAGES APPROVED IN SPAIN DURING PERIOD 2005-2017 • Mortgages started to decline even before the interest rates rose, due to an extenuation of the rising real estate market prices above the purchase power possibility of the clients. • This lead the banking system to lend the “cheap” and abundant money in the economy to every time less capable of mortgage house buyers. • This period is referred to as La Burbuja Inmobiliaria (The Real Estate Bubble) in Spain. Source: Statista.com
  9. 9. IMMEDIATE IMPACT OF 2008 CRISIS ON SPAIN
  10. 10. TREMENDOUS DECLINE IN REAL GDP (OECD DATA)
  11. 11. UNEMPLOYMENT EVOLUTION Source: Statista 2018, Worldbank
  12. 12. SECTORAL IMPACT Source: Idescat - Catalan Institution of Statistics 2018 There was a huge impact on the Construction sector during the crisis.
  13. 13. SHORT TERM AND MEDIUM TERM POLICY RESPONSES
  14. 14. POLICIES • Increase in Income Tax • Increase in VAT in 2010 and 2012, 16% to 21% • Wealth tax imposed in 2011 • Increased public spending from 2008 to 2009 • Increase in the government revenue in the Short Term • Strikes in the Short term • Another tax reform to make the system more fair for the poor OUTCOMES Short Term • Reduction in Spending on public services (2010-2013), • 2015 Stability Programme: 44% GDP in 2014 to 38.4% GDP in 2018 • Decrease in the wages of public employees • Decrease in the number of departments in offices • Strikes and protests Medium Term
  15. 15. • Golden Visa Non-EU habitant could obtain Spanish citizenship in return for an investment in Spanish real-estate property • Spanish Tax Amnesty 2012 (cancelled) • Increase in Foreign Direct Investment • Increase in immigration • Returning black money to the Spanish System. POLICIES OUTCOMES
  16. 16. • Lowered Interest Rates by the EU • People could afford their mortgages • It boosted investment again in Spain • People could start/ run their businesses again. • Unemployment declined SOURCES: Eurostat, INE and Banco de España.SOURCES: IMF and Banco de España. POLICIES OUTCOMES
  17. 17. STRUCTURAL FISCAL REFORMS Constitutional Reform: Cap on budget deficit • Commission on the Reform of Public Administrations (CORA) • Administrative Duplication, Administrative Simplification, Service Delivery and Shared Services, Institutional Administration Pension System Reforms • 2011 Legal Retirement Age 65 to 67 • 2014 Sustainability Factor and Revaluation Index AIReF Independent Fiscal Responsibility Authority
  18. 18. BANKING SECTOR REFORMS InstitutionsandMeasures In 2009, FROB (Fund for Orderly Bank Restructuring), a new institution for bank restructuring was created. To strengthen the solvency of banks by providing funds to facilitate processes of structuring To help entities in finding solutions for specific difficulties, thus minimizing the use of public resources In 2010, Stress tests and the exercise of information transparency introduced- to improve investor confidence in Spanish banking and to increase financial transparency. The regulation on provisions was tightened and the reform of Savings Bank Law was approved
  19. 19. BANK RESTRUCTURING MODEL: BANK BAILOUT SYSTEM • Fund for Orderly Bank Restructuring • European Stability Mechanism (ESM) 2012 €41.5 billion • Bank bailout: Government provided the capital that was “strictly necessary” to clean up the lender by converting its 4.5 billion euros ($5.8 billion) of preferred shares into voting shares, obtaining controlling stake of 45 percent in Bank • Banks wanted injections of 19 billion euros from the FROB • Credit institution equity reinforcement and orderly restructuring of credit entities with the aim of resuming the normal furnishing of credit to companies and households • Viable and non-viable entities • Consolidation → Solvency Improvement → Clean up Balance Sheets Objectives of Spanish Banking System Reforms Reorganization Recognition of losses Capitalization
  20. 20. LABOR MARKET REFORMS In 2010, Government took various reforms regarding: 1. Hiring Formulas: • The promotion of indefinite hiring • The extension of workers that can be hired • The introduction of new limits on temporary hiring • Extension of group of workers that can benefit from traineeships and apprenticeships. 2. Working conditions were modified 3. Changing established conditions with the employer was only allowed through a private agreement between employer and employee. 4. The laws include a commitment for reforming collective bargaining agreement with the social agent. Objectives of Labor Market Reforms Reduction of duality and wage rigidity Promotion of internal flexibility within firms SOURCE: Eurostat, INE and Banco de España.
  21. 21. SPAIN’S INCREASE IN EXPORTS • Spain needed to become more competitive in world market place but they could not change the interest rates or devalue their currency because of the existing turmoil. • The other option was to decrease the labor costs, which would lead to exporters to reduce their prices. • There was an emphasis on exporting. Source: World Development Indicators
  22. 22. CURRENT SITUATION OF SPAIN
  23. 23. • Real Estate: Boosted by strong economic growth; close to 465,000 property sales or purchases were recorded in 2017 • GDP: Spain GDP and its rates are recovering after crisis • Interest rate: Spain interest rates went significantly down after the crisis and now it is 1.37 • Unemployment: After 2008 it was growing, after 2013 falling and now it makes 14.55
  24. 24. SOURCES AND REFERENCES • THE 2012 LABOUR MARKET REFORM IN SPAIN: A PRELIMINARY ASSESSMENT. (2013). OECD. • Pérez, F. M. (2016). SPANISH PUBLIC FINANCES THROUGH THE FINANCIAL CRISIS. BANCODEESPANA. • Wagner, D. (2014). The Spanish Export Led Recovery. University ov Virginia. • 17/341, I. C. (2017). SPAIN- FINANCIAL SECTOR ASSESSMENT PROGRAM. IMF. • Pombo, G.-A. &. (2012). Spanish Tax Alert. • Researchgate: “Causes and Consequences of the Spanish Economic Crisis: Why the Recovery is Taken so Long?” https://www.researchgate.net/publication/227639627_Causes_and_Consequences_of_the_Spanish_Economic_Crisis_Why_the_Recovery_is_Tak en_so_Long • Picture: https://worldpolicy.org/2010/03/23/the-pain-in-spain/ • Spain economic crisis – Spanish bank needs propping up – Bankia cartoon http://www.chrismadden.co.uk/cartoon-gallery/page/13/ • The Local: “Spain's property market just recovered to pre-crisis levels” https://www.thelocal.es/20180220/spains-property-market-just-recovered-to-pre-crisis-levels • Countryeconomy.com: https://countryeconomy.com/gdp/spain • Ceicdata.com: https://www.ceicdata.com/en/indicator/spain/long-term-interest-rate • TradingEconomics.com: https://tradingeconomics.com/spain/unemployment-rate • Picture: http://www.chinadaily.com.cn/a/201801/29/WS5a6e5f40a3106e7dcc1373ab.html
  25. 25. SOURCES AND REFERENCES • Idescat- Catalan Institution of Statistics 2018, in thousands https://www.idescat.cat/indicadors/ • https://www.saintsavinenglish.com/5217/construction-cartoon-images-24-08-2018/free-construction-cartoon-images-barricade-stock-vector- illustration-of/ • Accessed from Report on the Financial and Banking Crisis in Spain 2008-2014, p. 85 • https://www.bde.es/f/webbde/Secciones/Publicaciones/OtrasPublicaciones/Fich/InformeCrisis_Cap2_en.pdf • http://www.realinstitutoelcano.org/wps/portal/rielcano_en/contenido?WCM_GLOBAL_CONTEXT=/elcano/elcano_in/zonas_in/international+econom y/ari11-2014-chislett-spain-banking-crisis-light-in-the-tunnel • Golden Visa Image: https://www.sun-lawyers.com/golden-visa-spain/ • CIA World Factbook • Statista: https://es.statista.com/estadisticas/533881/hipotecas-concedidas-por-los-bancos-en-espana/ • OECD Economic Outlook: Statistics and Projections comparison Spain OECD. https://data.oecd.org/gdp/real-gdp-forecast.htm#indicator-chart • Statista 2018, Worldbank https://www.statista.com/statistics/263706/unemployment-rate-in-spain/ • https://www.statista.com/statistics/263706/unemployment-rate-in-spain • Picture: https://www.123rf.com/photo_69194481_stock-vector-toreador-with-the-bull-spanish-bullfighting-vector-illustration-isolated-on-white- background-.html
  26. 26. THANK YOU FOR YOUR ATTENTION

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