Further, the major advantage for the Spanish economy that maintaining a comparatively low public debt/GDP ratio entails should be preserved. Watchfulness will also be needed to prevent current expenditure overruns that reduce the leeway available to undertake public investment programmes and fulfil other productive expenditure commitments made in the Budget. We should not forget that when public overspending occurs, the subsequent adjustment usually falls on productive spending and, most particularly, on public investment, with adverse consequences for long-term growth potential. In the current circumstances, moreover, having some scope to carry out the infrastructure investment plans under way is crucial for smoothing the adjustment in the construction sector. The State Budget should, in my view, comply with these premises. But the regional and local governments also have a major role to play in this task, since they account for a most significant portion of public spending – and, in particular, of public investment – and are facing a phase of rapid decline in their revenue-raising capacity. Elsewhere, a worrying aspect of the scenario I have described is the speed and intensity of the response by employment, which is amplifying the effect of the correction of the housing sector on the rest of the economy. This reveals the persistence of inadequacies in the workings of factor and product markets that mean that the weight of the adjustment falls on the level of employment, hindering the necessary reallocation of productive factors across sectors.

The missions were initiated after the Commission's General Secretariat had received the findings of the institutions' "internal validations". The purpose was to make sure that institutions were in compliance with the minimum regulatory requirements and, more generally, to check the quality of their information systems and the conditions in which these mechanisms are used and controlled. These inspections revealed that institutions had indeed already made extensive achievements, but also showed that some of them needed to make further progress on Pillar 1 of Basel II, especially with regard to: -  the collection and estimation of the Basel parameters, particularly probabilities of default (PD) and loss given default (LGD): on this point, it is important that banks should steadily upgrade again their historical data so as to cover full business cycles;  -  permanent control and validation of information systems and/or models: implementing thorough benchmarking and back-testing processes is crucial in this context. With regard to Pillar 2, the Commission Bancaire urges banks to make certain that their Internal Capital Adequacy Assessment Processes capture risks which are covered incompletely or not at all by Pillar 1, especially concentration risk, liquidity risk and overall interest rate risk. In the months ahead, priority must be given to developing stress tests that are more comprehensive, i.e. that encompass the various risks (credit, market, etc.) and that aim for exhaustive coverage of risk exposure. Banks must also meet their transparency requirements under Pillar 3 (market discipline), for both the content and the frequency of their disclosures.