fitch ratings downgraded spain’s long‐term foreign

8/9/2019 Fitch Ratings downgraded Spains LongTerm Foreign

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Sovereigns

www.fitchratings.com

Special Report Sluggish Recovery Key Riskfor Spain

SummaryFitch Ratings downgraded Spains LongTerm Foreign and LocalCurrency IssuerDefault Ratings (IDRs) to AA+ from AAA on 28 May 2010. The downgrade reflectsFitchs assessment that the process of adjustment to a lower level of private sectorand external indebtedness will materially reduce the rate of growth of the Spanisheconomy over the medium term. Despite these expectations, the Stable Outlook onSpains sovereign rating reflects Fitchs view that the countrys credit profile willremain very strong and consistent with its AA+ rating, even in the event of some

slippage relative to official fiscal targets.The Spanish government has announced an ambitious fiscal consolidation plan toensure a return to sustainable public finances after the global financial crisis. Fitchbelieves the Spanish government could find it hard to implement some of theexpenditure cuts. In particular, the agency has some doubts over the feasibility ofthe cuts that need to be made by Spains autonomous communities, who may alsosee a reduction in the transfers they will receive from the state budget.

Nevertheless, Fitch believes the risk that economic growth will fall short of thegovernments projections is a more important consideration. The Spanishgovernment is forecasting a sharp recovery in private consumption and investment.Fitch believes that Spains unemployment rate, the legacy of its construction boom,and its high level of indebtedness will weigh on private consumption and

investment in the medium term. Consequently, Fitch is forecasting weaker growthfor the Spanish economy in the medium term than the government is, although theagencys projections on the contribution of net trade to growth in the medium termare slightly more optimistic than those of the government.

Real Growth Forecasts(%) 2010f 2011f 2012f 2013f

Spanish government 0.3 1.8 2.9 3.1Fitch 0.5 0.5 1.7 1.9

Source: EU Stability Programme Update 20092013, Fitch

Fitchs analysis suggests that, on its weaker growth forecasts, general government

debt would rise to 70% of GDP by end2011, the same as the AAA median.However, in Fitchs scenario, debt would continue to rise, reaching almost 78% ofGDP at end2013, whereas the government projects debt will peak at 74% at end2012 and start declining. Fitchs analysis assumes that the government implementsall the consolidation measures it has pledged. It also assumes the same stockflowadjustment over 20102013 implicit in the governments Stability ProgrammeUpdate (EUR30bn). This reflects, among other operations, debt issuance to financethe restructuring of the banking sector.

Using a highly stressed scenario on the Spanish banking system assets with veryconservative NPL and lossgivendefault ratios, and assuming no preimpairmentoperating profit and no support from existing shareholders, Fitch estimates that thegovernments already announced EUR99bn for bank system support should be morethan sufficient to cover expected losses. Nevertheless, if the government were toissue the whole EUR90bn of debt resources available for bank restructuring in 2010and 2011, general government debt would rise to 76% of GDP at end2011 and 83%of GDP at end2013. Less than full implementation of the austerity plan, weaker

Ratings

Foreign CurrencyLongTerm IDR AA+ShortTerm IDR F1+

Local CurrencyLongTerm IDR AA+

Country Ceiling AAA

OutlooksForeignCurrency LongTerm IDR StableLocalCurrency LongTerm IDR Stable

Analysts

Eral Yilmaz+44 20 7682 [email protected]

Brian Coulton+44 20 7862 [email protected]

Paul Rawkins+44 20 7417 [email protected]

Related Research

Global Economic Outlook (April 2010)

Spain (research)

Major Spanish Banks: SemiAnnual Reviewand Outlook Asset Quality a Key

Challenge (March 2010)

HighGrade Sovereigns and the Global

Financial Crisis (March 2009)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=429340http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=507905http://www.fitchratings.com/creditdesk/research/issrresrch_new_arcs.cfm?cppv=&tabselected=Rsrch&issr_id=80442206&grp_typ_id=20&res_type=&sector_flag=2-3http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=509645mailto:[email protected]:[email protected]:[email protected]


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Sovereigns

Sluggish Recovery Key Risk for SpainMay 2010 2

than expected growth, deflation or a larger disbursement for the banking sectorwould further increase debt.

A Closer Look at Spains Growth TrajectoryFitch believes that both demand and supplyside factors may constrain Spainsmediumterm growth prospects. This section examines these factors in more detail.It also looks at two positive factors in Spains growth story: the fact that theinvestment boom was not solely concentrated in housing construction and thepositive contribution of net trade to growth.

Demographic Factors: A SupplySide Constraint on GrowthSpains real growth averaged 3.3% between 2000 and 2008. The growth was drivenpredominantly by demographic factors and increased labour force participationrather than productivity. In fact, Spain experienced a decline in productivity duringthis period, the only EU country to do so, with the exception of Italy. Rising femaleparticipation in the labour force, coupled with very high levels of immigration,

explains the contribution that demographic factors made to growth during thisperiod. Spain recorded the largest increase in the percentage of femaleemployment in the EU. However, the potential increase in female labour supplyover the medium term is likely to be lower, as the level of female participation inthe labour force had converged with that of the euro area in Q309.

50

55

60

65

2000 2003 2006 Q309

Spain Euro area(%)

Female Labour Force Participation

Activity rate, annual average

Source: Eurostat

0

10

20

30

40

50

Q100

Q400

Q301

Q202

Q103

Q403

Q304

Q205

Q106

Q406

Q307

Q208

Q109

Q409

0

1

2

Total pop'n yoy growth (RHS)

Immigrant pop'n yoy growth (LHS)

Total unemployment (LHS)

Immigrant unemployment (LHS)

Immigration and Unemployment

(%)

Source: Eurostat

(%)

There were over 5 million immigrants in Spain at end2009, accounting for almost12% of the population, up from 2.5% of the population in 2000. With the exceptionof Ireland, Spain had the highest percentage increase in foreign participants in thelabour force between 2000 and 2008 in the EU. However, the recent rise inunemployment has disproportionately affected foreign workers, partly because

immigrants are more likely to have been working in the construction sector or on atemporary contract: around a quarter of construction workers are immigrants1 andover half of temporary contracts are used to employ immigrants2.

While Fitch believes the relative attractiveness of working conditions in Spainsuggests immigration will continue to be a feature of the Spanish labour market(over half of Spains immigrant population come from Latin America and Africa3),the agency expects much more subdued immigration flows in the near term. Thenumber of immigrants in Spain declined in H209. This would diminish the positiveeffect on growth that can be attributed to high immigration.

Increasing labour productivity will become more important as a growth driver in theSpanish economy as the contribution of increasing female labour force participation

1 IMF Article IV on Spain, April 20092 OECD Economic Survey, Spain, 20083 OECD Economic Survey, Spain, 2008

1

1

3

5

IE GR ES GB EU FR DE PT IT

Employment (pp)

Productivity (pp)

GDP (%)

Components of GDP

(Average growth rates, 20002008)

Source: Eurostat


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Sovereigns


and immigration to growth become more subdued. An increase in productivity islikely to require an acceleration of reforms to improve product and labour marketflexibility. While Spains product market is relatively liberalised (ranking seventh

out of 30 OECD countries), the country fares relatively badly overall in the WorldBanks Ease of Doing Business indicators, with very restrictive permanentemployment legislation and barriers to starting up businesses.

Fitch judges Spains supplyside flexibility the capacity of the economy toreallocate labour and capital resources following shocks to be moderatecompared with other highgrade sovereigns4. In particular, the high proportion oftemporary employment contracts in the labour market makes it easier forcompanies to adjust to the economic downturn by shedding staff rather thanreducing wages, resulting in a more marked increase in unemployment than inother highgrade sovereigns.

Wage growth appears to have moderated in Q110 but was still positive. From thepoint of view of maintaining potential growth rates, price rather than quantity

might be a more optimal form of labour market adjustment, as high levels ofunemployment, and especially longterm unemployment, could result in work skillsbecoming obsolete and a lower potential growth rate. While Fitch recognises thatthere are gains to be made from productivityenhancing reforms, these will taketime to be passed into law and implemented and then to have a positive impact onthe growth rate.

High Indebtedness Also Weighs on Future GrowthWhile demographic factors are a supplyside constraint on growth, the overhangfrom the real estate boom and the need for privatesector deleveraging will act asdemandside constraints on Spains mediumterm growth prospects.

10

40

90

140

190

240

290

Gross debt Net debt Net financial wealth

US GB Euro zone ES

Household DebtAs % of household income at Q309

(%)

Source: National authorities, Datastream

Spains household sector is more heavily indebted than the euro area average:household debt equates to 106% of household income in Spain, compared with 95%in the euro zone. Net debt (debt minus household deposits) is 10% of householdincome in Spain, whereas the euro zone household sector is a net creditor to thetune of 9%. Spains gross and net household debt/income ratios compare favourablywith those of both the UK and the US, where household indebtedness is evenhigher.

Nevertheless, net financial wealth (total financial assets held by households minushousehold debt) as a proportion of household income is lower in Spain than in theeuro zone, the US and the UK. This reflects, in particular, the fact that Spanishhouseholds have much lower financial assets in the form of insurance or pension

funds.

4 See HighGrade Sovereigns and the Global Financial Crisis under Related Research on the frontpage

0

10

20

30

ES PT DE FR IT GB

Temporary EmployeesAs % of total employees

Source: Fitch


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The ratio of gross household debt toincome has been declining since Q208and at endQ309 had fallen to the same

level it was at Q406. This is similar tothe pattern of household deleveragingin the UK, where the gross householddebt/income ratio peaked slightlyearlier in Q108 and at Q309 had fallento the same level as in Q306. In Spain,net household debt/income peakedearlier than gross debt/income (atQ307), and at Q309 had fallen backalmost to end2005 levels. Thedifference reflects the substantial risein Spanish household deposits, whichcontinued to grow even as the growth in gross debt was levelling off. Net household

debt/income in the UK has followed a similar pattern.

Household sector deleveraging is set to continue to weigh on growth. Spanishhouseholds saving ratio increased significantly over 20082009 to almost 19%,higher than for many of its peers. It is likely to remain high for some time, givenhigh unemployment, the decline in household wealth, and financial constraintsrelated to debtservicing. As such, the potential boost to private consumption fromthe household saving ratio falling back from a high level will be muted. This willlikely prevent the abovetrend bounceback in growth typically witnessed asrecovery progresses.

150

100

50

0

50

100

150

Gross debt Net debt Net financial wealth

GB Euro zone ES

Corporate Sector Debt

At Q309, as % of 2009 GDP

(% GDP)

Source: National authorities, Datastream

While a heavily indebted household sector is a feature Spain shares with the US and

the UK, Spains corporate sector is relatively more indebted and will thereforeincrease the burden of privatesectordeleveraging and weigh on growthprospects. Spains corporate sector isheavily indebted, with gross and net debtto GDP both significantly higher than inthe euro zone as a whole and also theUK. Fitch notes that the construction andreal estate sectors account for almosthalf of the debt owed by nonfinancialcorporates. Overall net financialliabilities (total financial liabilities minustotal financial assets) of the Spanish

corporate sector as a percentage of GDPis also higher than in the euro zone as awhole and the UK.

30

10

50

90

130

170

Q499

Q300

Q201

Q102

Q402

Q303

Q204

Q105

Q405

Q306

Q207

Q108

Q408

Q309

GB gross ES grossGB net ES net

(%)

Households Deleverage

Gross and net household debt/income

Source: Datastream and Fitch

30

60

90

120

150

Q499

Q300

Q201

Q102

Q402

Q303

Q204

Q105

Q405

Q306

Q207

Q108

Q408

Q309

GB gross ES gross

GB net ES net(% GDP)

Less Deleveraging in Corporates

Gross and net corporate debt to GDP



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Deleveraging appears to be progressing more slowly in Spains corporate sectorcompared with its household sector. Gross and net corporate debt/GDP peaked inQ209, marking only one quarter of decline. UK gross and net corporate debt has

continued to rise.Another indicator underlining the indebtedness of the Spanish economy is thedeterioration in the total net external debt burden and international investmentposition (IIP) relative to GDP, which has been driven by the private sectors foreignborrowing. A high external interest bill to service will also constrain domesticdemand. Fitch estimates that Spain would need to achieve a primary currentaccount surplus (the balance on goods, services and transfers, excluding the incomebalance) of 1.4% of GDP to stabilise the net international liability position. Spainrecorded a primary current account deficit of 2.6% of GDP at end2009 whichimplies that domestic demand will have to fall further relative to GDP to achieve asurplus.

0

35

70

105

140

Q199 Q300 Q102 Q303 Q105 Q306 Q108 Q309

ES corporate and household net debt

GB corporate and household net debt

(% GDP)

Spain: High Net PrivateSector Debt


100

70

40

10

20

50

80

99 00 01 02 03 04 05 06 07 08

GB NXD ES NXD

GB net IIP ES net IIP

(% GDP)

Spain: Net External Debt Also High

Source: IMF and Fitch

Construction Weighs on Growth But Investment Boom Was Not AllHousingThe unwinding of the construction boom will weigh on investment in the mediumterm, constraining Spains future growth. New housing supply is set to contractsharply, as housing approvals fell to 147,000 in December 2009 over the preceding12 months from above 920,000 in early 2007.

2

1

0

1

2

Q295

Q495

Q296

Q496

Q297

Q497

Q298

Q498

Q299

Q499

Q200

Q400

Q201

Q401

Q202

Q402

Q203

Q403

Q204

Q404

Q205

Q405

Q206

Q406

Q207

Q407

Q208

Q408

Q209

Q409

Household consumption Government consumption Investment

Net trade GDP

Quarterly Contribution to Growth: The Importance of Investment

(%)

Source: Datastream


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Housing Construction in the EUIE GR ES CY Euro area DK GB

Average weight of housing construction in GDP (%)a 8.6 7.2 6.7 6.6 5.6 5.2 3.1

Average contribution of housing construction toannual growth (%)b

0.5 0.5 0.4 0.6 0.1 0.3 0.2

a 20002009 or 20002008 if not availableb 20012007Source: Eurostat, Fitch

A closer look at the components driving growth in Spain over the last decadeunderscores the importance of investment. At the height of Spains boom in 2007,domestic investment reached over 30% of GDP, the highest rate in Western Europe.During this period, an unsustainable volume of resources was directed to theresidential construction sector. While the increase of household formation due todemographic changes and the increase in population resulting from immigrationpartly justified the increase in housing stock, there was a significant oversupply of

housing by the end of the boom, due in part to an element of speculation on theback of rapidly increasing house prices and cheap labour and credit (Spains entryinto the euro area heralded a period of low real interest rates).

Between 2000 and 2009 (or 2000 and 2008 for countries for which 2009 data is notavailable), the average share of housingrelated construction in GDP was the thirdhighest among all EU member states, after those in Ireland (AA/Stable) andGreece (BBB/Negative). At its peak, residential housing employed over 10% ofSpains workforce.

However, it is important to note that while Spains investment boom and growthtrajectory were partly related to the housing boom, this was not the whole story.The contribution of housing construction to growth averaged 0.43% between 2001

and 2007, less than a third of the average contribution to growth made by totalinvestment. Even at the peak of the boom, housing construction was not the mostsignificant investment by type of asset. Investment in nonhousing construction wasalso significant but the largest share of investments has been in other sectors,including metals, machinery and transport equipment. This suggests that companiesshould be in a good position to take advantage of a pickup in domestic or externaldemand.

6

3

0

3

2001

2002

2003

2004

2005

2006

2007

2008

2009

Total investment Housing construction

Not all HousingContribution to annual growth

(%)

Source: Eurostat

0

7

14

21

28

35

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Housing Other assets

Other constr. EU housing

EU nonhousing EU other

Investment by Asset Type

Spain and EU15

(% GDP)

Source: Eurostat

Net Trade Makes a Positive Contribution to GrowthWhile domestic demand has long made a positive contribution to the Spanisheconomy, net trade has been a drag on growth, particularly in the latter years of

Spains boom. However, the onset of the crisis saw domestic demands contributionto (quarterly) growth turn sharply negative from Q108, seemingly reaching a nadirin Q109 before finishing the year still slightly negative. Net trade, on the otherhand, began to register a positive contribution to quarterly growth in Q108.


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3

2

1

0

1

2

Q103

Q203

Q303

Q403

Q104

Q204

Q304

Q404

Q105

Q205

Q305

Q405

Q106

Q206

Q306

Q406

Q107

Q207

Q307

Q407

Q108

Q208

Q308

Q408

Q109

Q209

Q309

Q409

Domestic demand Net trade

Spain quarterly GDP growth Euro 12 quarterly GDP growth

Quarterly Contribution to Growth: Domestic Demand vs. Net Trade

(%)

Source: Datastream

The positive contribution of net trade to growth can be linked to the fact thatimports, which had risen much more quickly than exports in real terms during the

boom, slowed much faster during the downturn. The sharp slowdown in domesticdemand caused import demand to collapse, while exports may have been buoyed bythe reorientation of sectors serving domestic demand towards the export market.Real exports began to grow on a quarteronquarter basis in Q209, after threeconsecutive quarters of contraction. However, real imports bounced back quitevigorously in Q309 (after five consecutive quarters of contraction), suggesting thatthe positive contribution of net trade to growth could weaken in 2010. Imports ofconsumer goods appear to have been the most resilient throughout the downturnand, unsurprisingly, imports of capital goods the worst affected.

15

10

5

0

5

10

15

Q107

Q207

Q307

Q407

Q108

Q208

Q308

Q408

Q109

Q209

Q309

Q409

Real exports Real imports(%)

Imports Also Return to Growth

QoQ sa growth

Source: Datastream

15

8

1

6

13

20

Q107

Q207

Q307

Q407

Q108

Q208

Q308

Q408

Q109

Q209

Q309

Q409

Intermediate goodsConsumer goods

Capital goods(%)

Decomposing the Import Recovery

Real sa qoq growth

Source: Datastream

Data on Spains export performance reveals a mixed picture. On an index basis, the

volume of exports of goods and services fell below the euro area average after2005. Spains market share of EU imports declined after 2003 but less sharply thanin France, Italy or Portugal. Furthermore, Spain managed to recover some lostmarket share in the first 10 months of 2009, although the export sector will havebenefited from various temporary fiscal stimulus packages around Europe. On apositive note, Spains real effective exchange rate, which had risen well above thatof other large European countries, began to correct in H208 as the inflationdifferential with EMU fell.


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Sovereigns


100

110

120

130

140

150

2000 2003 2006 2009

ES Euro area

PT FR

GB DK

Export Performance

Index, 2000 = 100

Source: Eurostat

0

2

4

6

8

1994 1997 2000 2003 2006 10M09

ES IT PT

FI GB DK(%)

Export Market Share

Total EU imports

Source: Datastream and IMF DOTS

From euro adoption until Q408, annual inflation in Spain was around 1pp higher

than the euro area average, eroding Spains international price competitivenessagainst other euro area economies. However, the inflation gap started falling inQ408 and was in negative territory throughout most of 2009. Fitch believes theinflation differential will remain negligible in 2010, removing this pressure fromSpains export performance.

85

95

105

115

125

Q194 Q396 Q199 Q301 Q104 Q306 Q109

ES DE PT

FR FI IT

Real Effective Exchange Rate

ULC, 36 trading partners, 1999 = 100

Source: Eurostat

2

0

2

4

6

1997M01

1998M02

1999M03

2000M04

2001M05

2002M06

2003M07

2004M08

2005M09

2006M10

2007M11

2008M12

2010M01

Difference ES Euro area

(%)

Inflation in Spain and Euro Area

Source: Eurostat

How has this affected Spains current account deficit? The current account deficitfell from 9.7% of GDP in 2008 to 5.4% of GDP in 2009. The fall was drivenpredominantly by the almost halving of the trade deficit (to 4.3% of GDP) and slightimprovements in both the income and transfers deficits. The services surplus alsoincreased slightly, to 2.5% of GDP. Fitch is forecasting a further contraction of thetrade deficit in 2010 and 2011, which should drive the current account deficitlower. Nevertheless, a current account deficit forecast at 4% of GDP in 2011 willstill require external financing.


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Sovereigns


15

10

5

0

5

10

Q200

Q300

Q400

Q101

Q201

Q301

Q401

Q102

Q202

Q302

Q402

Q103

Q203

Q303

Q403

Q104

Q204

Q304

Q404

Q105

Q205

Q305

Q405

Q106

Q206

Q306

Q406

Q107

Q207

Q307

Q407

Q108

Q208

Q308

Q408

Q109

Q209

Q309

Q409

Goods Services Income Transfers Current account balance

Lower Trade Deficit Brings in Current Account Deficit

(% GDP)

Source: Datastream

Fitch Forecasts Weak Growth in the Medium TermFitchs forecasts on the contribution of net trade to growth in the medium term areslightly more positive than those of the Spanish government, reflecting a slowerrecovery in imports (on the basis of a relatively weaker projected domesticdemand) and slightly stronger export growth projections. Nevertheless, for 20102013, Fitch is forecasting a slower recovery in private consumption and investmentthan the Spanish government, as economic activity is weighed down by highunemployment, the high level of indebtedness of the private sector and the legacyof the construction boom.

The contraction in private consumption in Spain in 2009 was much more markedthan in other large highgrade economies such as France, Germany or the UK, andretail sales continue to decline year on year at a faster pace than in thesecountries. Consequently, the agencys growth forecasts for Spain are more subduedthan the governments. (See Slow Growth Would Hurt the Public Finances below fora discussion of the effect that lowerthanexpected growth would have on thepublic finances.)

How Much Support Will the Banking Sector Need?Spanish banks successfully weathered the first stage of the global financial crisisdue to their low exposure to the US subprime market and complex structuredproducts, prudent regulation (including dynamic loanloss provisioning and strictrules, which reduced incentives to set up offbalancesheet vehicles), and banksmainly retailoriented business model. The banks relative strength is reflected in aBanking System Indicator of B, placing it among the highest 11 Fitchrated bankingsystems.

However, increasing difficulties in the domestic market especially in theconstruction and property development sectors, where credit expansion wasespecially pronounced during the boom years have put pressure on most banks

9698

100

102

104

106

Q107 Q207 Q307 Q407 Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110 Q210 Q310 Q410 Q111 Q211 Q311 Q411

ES US GB Euro zone

(Index, Q107 = 100)

Slower Growth Forecast for Spain

Real GDP


April 2010 GEO forecast


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Sovereigns


asset quality and profitability. Spanish banks are suffering from a sharpdeterioration in domesticloan credit quality through the cycle. Banks nonperforming loans (NPLs) reached 5.1% of total loans at end2009, up sharply from 1%

in 2007. However, this ratio does not include recent debtforassets (includingforeclosed property) and debtforequity swaps by Spanish banks and cajas (unlistedsavings and loan institutions that account for around one half of the assets in theSpanish banking system). Fitch estimates that the ratio of impaired to total loansincluding foreclosed assets (both in the numerator and the denominator) would bearound 8% at end2009.

Using a highly stressed scenario on the Spanish banking system assets, Fitch hasestimated the potential drawdown on resources from the Fund for Orderly BankRestructuring (FROB), which was set up by the Spanish government in July 2009.The FROB, which has a total value of EUR99bn, is funded with EUR9bn of capitaland up to EUR90bn of governmentguaranteed debt. To date, only EUR3bn of debthas been issued by the FROB and the call on its resources amounted to only

EUR2.2bn (to support three different merger processes involving eight cajas).Using very conservative NPL and lossgivendefault ratios, and assuming no preimpairment operating profit and no support from existing shareholders, Fitchestimates that the FROB should be more than sufficient to cover expected losses,given the existence of loan impairment and other reserves of EUR68bn. It should benoted that this analysis ignores the buffer provided by net income. If Fitchsforecasts for preimpairment operating profits for Spanish banks for 2010 and 2011were included, the potential drawdown on FROB assets is even lower. It is alsoworth noting that the stress test includes the loan portfolios of Spains largestbanks, for which Fitch does not anticipate any need to use FROB funds.5 However,Fitch notes that the caja sector is more exposed to the real estate and constructionsectors which could weigh more heavily on its asset quality. Furthermore, therestructuring of this sector is progressing slowly which could intensify constraints onthe supply of credit and affect the pace of economic recovery for the country.

Slow Growth Would Hurt the Public FinancesFitch notes that Spains planned fiscal adjustment is strong relative to austerityplans that have been adopted by other European governments (see table above). Tobring the fiscal deficit down to below 3% of GDP in 2013, the government hasannounced a series of measures through the 2010 budget, an immediate actionplan for 2010, a separate austerity plan for 20112013 and agreements with theautonomous regions and municipalities. These measures reflect a total fiscalconsolidation effort of 5.7% of GDP. Furthermore, in May 2010, the governmentannounced additional measures totalling 1.5% of GDP to accelerate deficitreduction in 2010 and 2011.

5 The IMF has estimated that the FROB might be required to disburse EUR22bn in an adversescenario. See Global Financial Stability Report April 2010 www.imf.org


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Sluggish Recovery Key Risk 14

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fitch ratings downgraded spain’s long‐term foreign

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