Luis M Linde: The internationalisation of the Spanish economy
Testimony by Mr Luis M Linde, Governor of the Bank of Spain, before the Special Senate
Committee for the Development of Internationalisation, Madrid, 2 June 2014.
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Ladies and gentlemen,
Allow me to begin by thanking Mr. Pío García-Escudero and the Chairman of this Special
Committee, Mr. Iñaki Anasagasti, for the opportunity to participate in your work.
First, today, I shall set out some matters relating to the internationalisation of the Spanish
economy and capital flows between Spain and the rest of the world. Next, I shall detail the
main characteristics of the international trade financing structure and of the funding of
longerterm projects. And finally, I shall review the characteristics of, recent developments in and
regulatory treatment of such trade in respect of the remit of the Banco de España.
Recent developments in the external sector of the Spanish economy
In the second half of 2013 a scenario of recovery began to take shape in our economy. A
combination of several positive factors, both at home and abroad, has contributed to a
situation in which Spain is beginning to overcome its second recession since 2008. The
gradual improvement in GDP growth figures has been accompanied by a sustained
correction of the main imbalances built up during the previous upturn. Progress here has
helped Spain in ceasing to evidence excessive macroeconomic imbalances, in the opinion of
the European Commission, expressed in the conclusions of the report it issued on 5 March
as part of the European Semester. This is a positive result which should nevertheless not
distract us from the need to continue adopting measures that further the correction of the
imbalances still in place, even though appreciable progress is being made.
Of most visibility and weight has been the redressing of the external deficit. Following a
deficit of 10% of GDP in 2007, the external balance posted a surplus of 1.5% of GDP in
2013. From the standpoint of its contribution to GDP growth, net external demand has
substantially cushioned the fall-off in domestic demand.
The opening-up of our productive system to the external sector through trade flows and
foreign direct investment is, as you know, one of the factors that has most boosted the
modernisation of the Spanish economy in recent decades. The aggregate share of goods
and services imports and exports from 1995 to 2013 has risen from 45% to 66% of GDP,
outpacing countries such as France and Italy, although it is still some distance off those
economies with greater export potential, such as Germany.
The buoyancy of Spanish exports has exceeded the increase in global trade. Our export
share in the world total, in real terms, has increased over the past five years to around 2.2%,
slightly above the relative weight of our economy in world output. This trajectory is all the
more significant when compared with events in other developed economies and, in general,
in the euro area as a whole, where export shares fell during the crisis.
Our sound export performance has been underpinned both by gains in competitiveness and
the pick-up in external demand, as well as by more structural factors, allowing us to expect
this potential to continue and become more entrenched in the long run. The structural factors
include the geographical diversification of exports of Spanish goods and services to
emerging markets and the more export-oriented gearing of our companies, which is reflected
in the increase over recent years in the number of Spanish companies competing on
international markets.
The re-directing of exports towards emerging markets has contributed significantly to these
developments, thanks to the substantial dynamism of the demand for imports in those
countries. Indeed, their dynamism has compensated for the cyclical weakness in the
developed countries, particularly in the euro area.
The relative weight of goods exports to emerging countries has increased since 2007,
coming to account for 30% of the total. The increases have been across the board, although
particular mention may be made of Latin America, China and North Africa. However, the
share of the developed countries has fallen on the same scale, owing to the loss in the
weight of sales to the euro area, which at end-2013 stood slightly below 50%. In parallel,
there has also been an increase in the variety of goods and services exported, with
intermediate goods and services accounting for a growing proportion.
Since 2007 the number of Spanish goods-exporting companies has increased by more than
40%. And this despite the difficulties the international environment has undergone and the
competition from the emerging economies. Moreover, the contribution of SMEs to this
process is beginning to be significant.
A further reflection of the internationalisation of the Spanish economy in the past two
decades has been its growing share in international direct investment flows, not only through
foreign capital inflows, but also through investment by Spanish firms abroad. Spain has
become a net issuer of direct investment, running counter to the historical pattern.
Large Spanish companies initially directed their foreign investment towards Latin America,
diversifying subsequently towards the European Union. Currently, these two areas account
for 50% and 30%, respectively, of total Spanish foreign direct investment in the rest of the
world.
Direct investment flows into Spain, after having been interrupted at the height of the euro
area financial market tensions in 2012, are regaining their pre-crisis levels. The gains in
competitiveness and the reforms undertaken have no doubt increased the attractiveness of
our economy to investors.
The headway made in the internationalisation of the economy against a particularly difficult
background underscores the competitive capacity of part of the Spanish productive system.
However, despite progress in recent years, Spain's share in some potentially very dynamic
markets is still low and faces major challenges, in a world of growing competitive pressures
and the globalisation of production channels.
Nor should it be forgotten that our economy's dependence on energy and capital goods
imports and the high net payment of income to the rest of the world, as a result of high
external indebtedness, are a permanent constraint as regards achieving the surpluses on
current and capital account that are needed to deleverage our economy.
Institutions and financial policy for the internationalisation of Spanish companies
Internationalisation calls for a series of financial services in which the banking industry plays
a central role. These services can be grouped into two major categories: operations geared
to mitigating the risk of transactions, namely guarantees and insurance; and those geared to
providing liquidity or financing to companies.
On the data available, regarding the importance of banks in financing international trade,
banks participate directly in approximately one-third of global trade.
On one hand they offer financing, usually short-term in nature, which responds to the
exporter's or importer's liquidity or working capital needs. They also offer coverage for risks
through guarantees or insurance, ensuring the successful completion of transactions for the
customer. Moreover, the extension of coverage for credit risk facilitates - albeit indirectly -
access to financing by reducing risk on the company's balance sheet and, consequently,
reducing the financial cost of the transaction.
The remaining two-thirds of the financing of international trade are covered through
intercompany credit, without the direct involvement of banks. Nonetheless, these transactions
might be indirectly backed by the banking sector, for instance through the discounting of bills
that enables the company to obtain financing by using its customer trade receivables.
The instruments used by banks to finance international trade share certain characteristics.
They are short-term instruments with low credit risk (low default rates) and are
nonrenewable.
Notable among these instruments are pre-export credit, which allows the exporter's
production or transport costs to be covered, and export loans, whereby companies obtain
short-term financing to cover financing needs in the event of deferred payment by the
supplier.
Also of note is the recent securitisation of assets linked to international trade financing.
Securitisation is a habitual practice in the finance industry, but its application to these assets
is quite new. By means of such securitisation, banks release capital and liquidity while
nonbank institutions are able to invest in international trade-related securities.
Asset securitisation has been regulated in Spain since 1981, but the developments aimed
specifically at promoting securitisation linked to the financing of foreign trade are much more
recent. "Internationalisation covered bonds" were introduced by Royal Decree-Law 20/2012
on 13 July 2012, and in Law 14/2013 of 27 September 2013, on support to entrepreneurs,
this legal framework was amended with a new instrument, namely "internationalisation
bonds". Unlike covered bonds, the latter are backed by packages or specific groups of
foreign trade financing operations. These new bonds may contribute to reducing exporting
firms' financial costs and to increasing the total volume of financing.
Along with providing financing, banks also extend coverage for export risks, relating for
instance to the recipient country's economic or political situation, so-called "country risk"; the
risk that products may be damaged in transit or withheld at borders; collection difficulties in
the event of non-payment, associated with different jurisdictional frameworks; and greater
uncertainty in the relationship between the supplier and acquiring company.
Banks have used various instruments to extend guarantees on international trade flows.
The classic instrument is, of course, the documentary credit. The importer's bank guarantees
the exporter's bank that payment will be made once it has been confirmed, through
presentation of the pertinent documentation, that the transaction has been correctly
completed. In this way, exporters notably reduce their risks.
Naturally, the demand for coverage of credit risk is higher for trade flows with countries with
which there are fewer historical ties and with those trade partners for which greater risk is
perceived. Accordingly, this may prove important in the opening-up of new markets and in
flows to emerging economies.
As regards the medium and long term, the nature and functioning of transactions differ from
those for short-term transactions. The financial services provided by banks for longer-dated
terms are, essentially, financing and the extension of guarantees and bonds needed to
participate in international tender procedures. On many occasions these are syndicated
operations, or operations performed by several banks from various countries.
We should highlight here the role played by export credit companies. This activity is subject
to the rules set under the OECD Arrangement on Officially Supported Export Credits, or the
OECD Consensus, as it is usually called.
The OECD Consensus
The OECD Consensus, signed in 1976, has regulatory status in the European Union and
seeks to prevent financial facilities granted by a State to an exporter from distorting
competition and giving an exporter an unfair advantage against competitors from other
countries. The Consensus also works on the assumption that official support is warranted
only if there is a "market failing" that prevents the private sector from properly meeting its
task as a financier. The Consensus sets common rules for exports in the medium and long
term, understanding as such terms over two years, and specifies that official support may
take the form of either direct public financing of the export, or the underwriting by the public
sector of the refund of the export financing granted by private institutions.
In Spain, CESCE (Spanish Export Credit Insurance Agency) pursues its activity on behalf the
State, complementing that of the banking system. Among its operations, what affords the
greatest value added is the coverage of credit risk arising from a Spanish export, of a
relatively high amount, at a term of over two years, habitually financed by a bank. Such
coverage is the norm for exports towards countries with appreciable risk and in transactions
which, frequently, have the sovereign guarantee of the importing country.
CESCE also provides underwriting on the State's behalf for the political risks associated with
exports (the main such risk being default by the sovereign or by the institutions backed by
the sovereign), except in operations at less than two years in EU and OECD countries,
where it is considered that there is a sufficiently developed private underwriting market; it
also extends guarantees and bonds for participating in international tender procedures and
projects.
From 1998 to 2007 there was a strong expansion in international banking activity in financing
for Spanish companies' international activity. Banks took on a relevant role in the financing of
trade flows to emerging countries and in the opening-up of new markets.
Against the backdrop of this boom, the use of instruments offered by export credit agencies
for exports became less necessary and less frequent.
The international financial crisis
The financial instability as from mid-2007 and the outbreak of the crisis in autumn 2008
radically altered this financial landscape, giving way to an across-the-board decline in
financing by international banks. The contraction in credit had a particularly severe effect on
international trade, which fell by between 20% and 30% in the main economies.
The central banks responded to this situation through coordinated action that stabilised bank
financing conditions. The measures included most notably the currency swap lines opened
by the Federal Reserve and the main central banks, including the Eurosystem, which helped
ease the shortage of dollars. The G-20 also launched initiatives to raise funds for the
financing of international trade and to increase the funding of multilateral development banks.
Export credit agencies and their countercyclical measures contributed to easing the
problems. Against a background of high uncertainty, exporters sought to guarantee with
hedging instruments operations for which previously they required no insurance whatsoever,
but the supply of private financing was strongly depressed and its cost rose notably.
The difficulties of raising external wholesale funding and the need to shore up their solvency
ratios led Spanish banks to reduce their financing for export transactions. The impact on
medium- and long-term transactions (those CESCE could insure) was notable. Hence,
CESCE's activity declined given that without financing there can be no insurance.
The risk perceived by foreign institutions in their transactions with Spain also increased. This
led to a squeeze on the financing provided by some foreign banks, reflecting Spain's
sovereign downgrade. The increased risk perception lessened foreign banks' capacity to
accept guarantees from Spanish banks, even in the short term. As to the long term, foreign
banks restricted guarantees to Spanish companies to participate in international tender
procedures, or more generally, the financing of Spanish companies' long-term projects.
The tensions eased through various channels, among which the activity of CESCE, which
bolstered the extension of guarantees and bonds to Spanish companies to participate in
international tender procedures and projects.
Regulation by the Banco de España
The Banco de España, in the performance of its functions, lays down a series of accounting
and prudential rules that determine the requirements made of banks in the pursuit of their
activity. These rules comprise the regulatory implementation of Spanish legislation which, in
turn, is determined by European regulations and by the agreements reached on the Basel
Banking Supervision Committee.
Let me begin with accounting regulations and, in particular, with the rules on country risk
provisions, which are particularly significant in international trade transactions.
In these financing operations there is, alongside the risk of commercial insolvency, so-called
country risk, which includes, by way of sovereign risk, transfer risk (i.e. that it is not possible
to meet debts abroad owing to a lack of currency or the legal impossibility of transferring
currency) and other risks arising from international financial activity, such as expropriation
and natural disasters. As what is involved is a risk other than habitual commercial risk, it
requires a differentiated treatment under default provisioning rules.
These rules set provisioning percentages based on risk and criteria so that banks may make
an assessment of country risk by monitoring economic developments and the political and
institutional situation; further, they contain exemptions arrangements, with such exemptions
depending on the type of transaction, its term and the modus operandi. Notably, these rules
do not affect foreign direct investment by the Spanish financial system, since they do not
apply to debt instruments and to contingent risks, nor to risks vis-à-vis European Union
countries.
The impact of these rules on foreign trade is low since most trade finance products are not
subject to country risk provisioning. Trade credits with a maturity not exceeding one year are
exempt, as are pre-financing credits with a term equal to or less than six months for specific
export agreements.
The rules also provide for an exemption for CESCE insurance operations, which is an added
incentive for banks to have this guarantee in medium- and long-term transactions since, in
addition to eliminating default risk, they do not then have to set aside country risk provisions.
The prudential treatment of instruments supporting internationalisation and, specifically, of
instruments linked to short-term trade transactions draws on two significant regulatory
frameworks: Basel III, at the international level; and the Regulation (which is directly applicable in
all Member States) and the Directive on prudential requirements and their attendant supervision,
drafted within the European Union, namely Regulation (EU) No. 575/2013 on prudential
requirements for credit institutions and investment firms, which is directly applicable throughout
the EU, and Directive 2013/36/EU on access to the activity of credit institutions and their
prudential supervision. This latter Directive requires, in turn, national transposition.
The three major avenues of regulatory reform under Basel III and their transposition to the
European legislative framework, with consequences for foreign trade-related transactions,
are the treatment of credit risk for solvency purposes, the leverage ratio (the ratio of
topquality capital to total assets) and liquidity ratios. The discussions on solvency have been
concluded, while certain aspects of the leverage and liquidity ratios remain subject to review.
As regards the treatment of credit risk, Basel III recognises a lower foreign trade financing
risk than Basel II. As a result, the consumption of capital in these transactions is lower than
in other analogous short-term financing transactions. These changes have been transposed
into European prudential regulations.
Lastly, in connection with liquidity management and supervision, the Basel Committee (and,
to a greater extent, European legislation) has incorporated into the determination of the
short-term liquidity ratio a specific treatment for foreign trade-related transactions with a
residual maturity of 30 days or less. The potential adverse effect on the availability of
financing for foreign trade derived from the obligation to maintain sufficient, quality liquid
assets is thereby mitigated.
In an economy with a developed banking system such as ours, financing for the
internationalisation of the Spanish economy is largely conditional on developments at the
international level. The best policy for promoting the financing of the international expansion
of our companies is to ensure the financial stability and soundness of the Spanish financial
and banking system.