luis m linde : recent economic developments in the euro area and in spain, and important financial system projects address by mr luis m linde, governor of the bank of spain, at the annual conference 2013 of the asociacion de mercados financieros, madrid, 25 november 2013. * * * let me first thank the asociacion de mercados financieros, and its chairman, my good friend enrique prados, for kindly inviting me to accompany you today in this annual conference. the association – which draws together a large number of financial market professionals – performs important work in channeling initiatives aimed at contributing to the better working of those markets. their active collaboration with regulators in devising rules, their participation in public consultations and their educational role are all to be welcomed. my address today will be brief, so as not to outstay my welcome and encroach on your first course. it shall focus on three projects of particular importance for our financial system in the area of market infrastructures. but allow me first to comment on recent economic developments in the euro area and in spain, developments that point, as we know, to a turn for the better. to the euro area first. after six consecutive quarters of contraction, second - quarter gdp in the area this year posted positive growth of 0. 3 % in quarter - on - quarter terms ; in the third quarter it has held at a positive rate, albeit one of only 0. 1 %. the recovery thus seems to be holding, but it should be acknowledged that expectations for economic growth in the area continue to be very moderate in the short and medium term. the ecb continues with an expansionary policy stance. we have reached an all - time low in the interest rates on the main refinancing operations, now at 0. 25 % ; since july, a forward guidance policy has been pursued, conveying to economic agents the ecb ’ s decision to keep interest rates low for a prolonged period and to maintain generous liquidity provision. maintaining and stepping up this expansionary monetary policy has naturally had to do with the recent course of inflation, proxied by the consumer price index, which stood in october at 0. 7 % for the euro area as a whole, a rate substantially off the target of 2 %. against this background, the first signs of the start of a recovery in the spanish economy have begun to emerge. as you know, in the

of activity, and new lending in particular, decreased, and the high profitability of spanish deposit institutions seen so far, began to be eroded. the impact of these developments was uneven, impacting with greater force those banks that had most grown in the expansion and, in particular, a group of savings banks that had concentrated a significant portion of their lending portfolio in financing real estate developers. expectations about house prices, which had started to lose momentum in 2006, changed and prices began to fall, in a much more unfavourable macroeconomic setting and with financial institutions much more cautious about extending credit given the rise in bad debts and provisions, and the tightening of funding conditions. in view of these problems, the government and the bank of spain began to take decisive measures to tackle this “ classic ” crisis based on credit to the real estate market and to the abrupt change in cycle, as well as to the changes in the markets. firstly, to address the uncertainty on funding markets, a programme was set up that would allow banks to issue debt with the backing of the state and the ecb started to inject liquidity allowing full allotment. secondly, the fund for the orderly restructuring of the banking sector ( frob ) was created in 2009. with the frob we anticipated the need to equip bis central bankers ’ speeches ourselves with an instrument to carry out a far - reaching restructuring of the savings bank sector. the scale of the savings bank restructuring process has been huge. of the 45 previously existing savings banks, only 17 remain. the aims of the process were very clear. first, to take advantage of the concentration processes to restructure assets and correct the excessive fragmentation of this sector. second, to reduce the excess capacity in the savings bank sector. the adjustments are between 10 % and 25 % in the number of offices, and between 12 % and 18 % in staff. third, to reinforce the viability of the new institutions ( resulting from the mergers of several savings banks ) with the resources and the management capacity of the savings banks best placed to lead each of the concentration processes. finally, to ensure in the medium term that the lower number of institutions and the diminished capacity will allow a reasonable level of profitability in step with the risks incurred for the remaining institutions. to round off the adjustment, the legislation governing savings banks was also amended in an attempt to make the management of these institutions more professional and, most notably, opening them up to market discipline and to the possibility