Luis M Linde: From restructuring to transformation
Speech by Mr Luis M Linde, Governor of the Bank of Spain, at the 6th Financial Meeting "From
restructuring to transformation", organized by Expansión/KPMG, Madrid, 20 October 2015.
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6th
Firstly, thank you very much for the invitation to open this Financial Meeting organised by
Expansión-KPMG. This meeting is now a classic in our calendar and always provides the
occasion for interesting reflections and discussions.
One year on from the start-up of the Banking Union, the European financial system can be
said to have been strengthened, though this clearly does not mean that it is not facing major
challenges and problems. I would sum up the key features here in the following six points:
1. First, following the balance sheet analysis and the stress tests of institutions subject
to ECB supervision, and the start-up of the Single Supervisory Mechanism, today
there is more awareness of Europe's banking system and of its greater reliability.
2. Second, solvency levels have been shored up: Europe's banking system is now
sounder.
3. Third, in my opinion, is the greater transparency achieved regarding the situation of
the major European banks. And this, together with the Single Supervisory Mechanism
and the strengthening of solvency levels, has helped pave the way for banking
mergers and consolidation, which were far less conceivable before the start-up of the
Banking Union.
4. Fourth, alongside the Single Supervisory Mechanism, the Single Resolution
Mechanism, the Resolution Board and the Single Resolution Fund are also being
created and will likewise be pivotal to the construction of the Banking Union.
5. Fifth, this progress has notably coincided with very low interest rates, increasingly
stringent regulatory requirements and strong competition, bringing pressure to bear
on profitability. This may lead to attempts to achieve greater profitability at a higher
risk, something that the supervisory authorities must monitor closely.
6. Sixth, from the standpoint of banking system users and customers, in the last two
years a decline in and the practical removal of financial market fragmentation has
been achieved.
For Spain, the latest data indicate that the deleveraging of households and non-financial
corporations is continuing, albeit less intensely. At the same time, there is an increase in the
number of firms witnessing how their credit volume is growing (currently more than 40% of
non-financial corporations are increasing their borrowing). These firms generally have a better
balance sheet position and a brighter economic outlook.
The debt-to-GDP ratios of non-financial corporations and households alike have continued to
ease and are clearly below the peaks of the previous cycle in 2010, thus bringing Spain's ratio
closer to the average euro area ratio. Although private-sector deleveraging in Spain may yet
last for some time, it is reasonable to conclude that most of the adjustment has now been
made.
For the euro area as a whole, the gradual improvement in credit aggregates has continued in
recent months with an increase, albeit moderate, in the loans extended to financial
corporations and households. Across the euro area, the slight easing in lending standards for
firms and households can be seen to have continued, with the exception of those for household
mortgage loans, whose standards have been tightened owing to the regulatory changes
approved in several countries.
In any event, most crucial for how the European financial and banking system will fare in
coming years will be the macroeconomic setting. Let me turn now to recent developments in
and the outlook for the international and the Spanish economies.
The international economy
International financial and economic developments have been characterised in recent months
by heightened uncertainty. The main factors in this connection are: doubts over the intensity
of the adjustment of China's economy, and its consequences for international trade and the
global economy; the future timing and pace of US monetary policy normalisation; and the
course of oil prices.
The global economy has continued to grow, although at lower rates. The projections in the
IMF's latest report put global growth at 3.1% in 2015, 0.3 pp lower than in 2014, and 0.2 pp
lower than the July projection. Noteworthy is the change in the composition of global growth in
response to the slowdown of the emerging economies compared with the greater resilience of
the developed countries.
The situation in the United States, where the economy is in a cyclically more advanced position
and employment levels are close to their structural low, is conducive to the Federal Reserve
normalising monetary policy. However, the absence of inflationary pressure, the downturn in
and uncertainty over the global economy, and doubts about when interest rates will begin to
rise all cast a shadow which has prompted very mixed expectations.
As for developments in emerging economies, the slowdown in China, sharp adjustments to its
share prices and the depreciation of its currency during the summer have heightened the risks
of a steeper-than-expected fall in activity, with effects on the global economy through trade
and commodity prices and via indirect contagion effects owing to higher risk aversion in
international financial markets.
The main issue regarding the Chinese economy is not whether it slows by a fraction of a
percentage point more than projected, but rather the external consequences of such a
development. For example, a slowdown in growth to around 6% of GDP, compared with 7.3%
in 2014, is no grave cause for concern. In principle, these figures, which largely reflect the
change in China's production model to an economy more geared towards consumption, can
be managed by the authorities. The uncertainty lies in the difficulty of evaluating the external
effects of such changes, and the fact that the differing forecasts of private and public agents
are reflected in greater volatility in financial markets.
Asian and Latin American emerging economies are particularly sensitive to changes in the
international arena. In Latin America, GDP data for the second quarter show a significant
slowdown. The Brazilian economy, in particular, is worrying given its high budget deficit and
significant current account shortfall (although the latter has begun to be corrected), along with
inflation that needs to be contained and corrected as soon as possible. The IMF projects
Brazilian GDP will fall by 3% this year and will fall further, albeit moderately, in 2016.
I would like to indicate that the impact of the downturn in the emerging economies on Spanish
banks, even for those with significant exposure to some of these economies, has been
moderate. The geographical diversification of their businesses and the adjustments made to
their management have contributed to the stability of their balance sheets.
Developments in the euro area
As for economic developments in the euro area, growth in the second quarter was external
demand-led, although internal demand continues clearly to support disposable income arising
from lax monetary policy, the neutral fiscal policy stance, low energy prices and the
improvement in the labour market.
In September, the ECB revised downwards its growth projections for the euro area to 1.4% in
2015, 1.7% in 2016 and 1.8% in 2017.
It should also be noted that the approval and start-up of the Third Bailout Programme for
Greece has mitigated the risks in the area, a source of uncertainty for the Spanish and other
European economies.
A characteristic of the current situation in the euro area is the trend towards disinflation. The
ECB expects to end this year, 2015, with a positive - but very close to zero - inflation rate.
The risk of deanchoring medium-term inflation expectations does not seem imminent, but even
so, the tendency in recent months is once again somewhat worrying.
The phenomenon of inflation-free growth we are experiencing is one of the most noteworthy
features of global economic developments in recent years, and a subject of debate and
analysis by international economic organisations, academics and experts. The course of
energy prices and globalisation are undoubtedly explanatory factors, but the phenomenon is
admittedly one that poses many questions and, consequently, difficulties for economic policy.
ECB measures
For several years ECB monetary policy has striven to resolutely support economic recovery
through standard and non-standard measures.
After exhausting the standard measures, in September 2014 the ECB announced its
quantitative easing programme with two new components: the asset-backed securities (ABS)
purchase programme and the covered bonds purchase programme. Subsequently, in January
this year an agreement was reached to extend the programme to include public securities.
As at 30 September 2015, the assets acquired by the Eurosystem under the expanded
purchase programme amounted to slightly more than €475 billion, a substantial amount of
which (almost 72%) comprised government bonds.
The programme has helped enhance monetary policy transmission, by reducing the
fragmentation of European financial markets, and provided for lower borrowing costs for
households and firms. The depreciation of the euro has also contributed to easing financing
conditions.
At its meeting on 3 September 2015, the Governing Council of the ECB expressed its
readiness and ability, if required, to allow for more accommodation in its monetary policy
stance. To this end, it could - if considered necessary - use the flexibility already embedded
in the purchase programme to increase its size and extend its duration or modify its
composition.
The Spanish economy
To conclude, I would like to briefly discuss the Spanish economy and its outlook.
During 2015 the Spanish economy has been in what we could call a "virtuous triangle", by
simultaneously meeting three conditions: robust inflation-free growth, job creation and an
external surplus. In 2015 we are going to achieve GDP growth of more than 3%, a negative
average annual inflation rate, a current account surplus of more than 1 pp of GDP, and growth
in employment and social security registrations, prompting expectations of an unemployment
rate of less than 20% of the labour force by end-2016. However, the degree of uncertainty in
economic projections has widened notably in recent months and the risks of slippage have
risen owing to the downturn in the outlook for global growth.
However, the Spanish economy is in a position to meet these challenges. The reforms
implemented to date promote economic recovery and contribute to increasing Spain's
resilience in the face of exogenous shocks.
In any event, perseverance is necessary in correcting the imbalances that are a legacy of the
crisis, in particular high unemployment and our sizeable international debit position. To this
end, it is essential to maintain gains in competitiveness and contain indebtedness. Our
rebalancing efforts were against an adverse backdrop, as a result of the severe recession
affecting the Spanish economy between 2009 and the first half of 2013. We have not to
overstate our economic policy leeway, or jeopardise fiscal consolidation, which should remain
a guiding principle.
Thank you very much.