29. 05. 2018 testimony of the governor of the banco de espana before the senate in relation to the draft state budget for 2018 luis m. linde governor ladies and gentlemen, i appear before you today as part of the senate ’ s debate and approval process for the state budget for 2018. allow me to begin by reviewing the current international economic setting of the spanish economy and its outlook. i shall then refer to the main aspects of this draft budget. to conclude, i will mention what, in my opinion, are the main challenges for fiscal policy in spain in the coming years. the external setting of the spanish economy the external setting of the spanish economy broadly remains favourable, although the global economy is subject to factors of risk that should not be ignored. following several quarters of upward surprises, the opening months of this year have – more so in the euro area – seen some moderation in global economic activity whose scope is still uncertain. notwithstanding, the information available continues to point to the maintenance of the current upturn over the next two or three years, underpinned by the correction of the previous imbalances, agents ’ confidence, the favourable financing conditions and the boost from the expansionary fiscal policies in the united states. on the financial markets, despite the bout of marked volatility last february, asset values remain high by historical standards. at the same time, recent weeks have seen an appreciation of the dollar, which would be consistent with the expectations of further us interest rate rises, at a swifter pace than that in other economic areas. however, this appreciation might also be partly in response to a certain safe - haven effect, in a context in which certain risks appear to be rising, in particular in some emerging markets and areas subject to a high degree of political uncertainty. this latter factor is also contributing to heightening the uptrend in oil prices witnessed in recent months. the decline in activity observed in the euro area during the first three months of 2018, from 0. 7 % to 0. 4 % in terms of the gdp growth rate relative to the previous quarter, should be analysed with care. on one hand, it should be borne in mind that last year ’ s growth was particularly sharp ( the highest since the start of the crisis, almost a decade ago ) ; accordingly, it is reasonable to expect there should be some moderation. on the other, the as - yet very partial information available does not allow us to specify to what extent the change witnessed

ago by the banco de espana and the ecb for spain and the euro area, respectively. 2 by contrast, the latest news on the availability of a vaccine for early 2021 is clearly positive and, if confirmed, should help raise confidence and rule out the most adverse economic scenarios, even though the effects on activity will not be immediate. see, for example : s. c. myers ( 1977 ), “ determinants of corporate borrowing ”, journal of financial economics, 5 ( 2 ), pp. 147 – 175 ; s. kalemli - ozcan, l. laeven and d. moreno ( 2019 ), “ debt overhang, rollover risk, and corporate investment : evidence from the european crisis ”, ecb working paper no 2241 ; and t. philippon ( 2010 ), “ debt overhang and recapitalization in closed and open economies ”, imf economic review, palgrave macmillan, imf, vol. 58 ( 1 ), pp. 157 - 178, august. the banco de espana ’ s scenario 1 published in september envisaged quarter - on - quarter growth of 3. 9 % in 2020 q4 and of 1 % in 2021 q1. in this setting, and considering the potential news flow on a possible vaccine, economic policy should focus on continuing to provide support for households and firms affected by the crisis. the liquidity risks facing firms and the economic policies applied to address them let me now analyse the main financial risks that firms face in such a challenging environment. the two key risks are liquidity and solvency. the shock has given rise to a sharp fall in firms ’ revenues, as a result not only of the pandemic itself but also of the mobility - restricting measures introduced by the authorities to stop the spread of the virus. this contraction in firms ’ turnover, together with their fixed costs, has driven up firms ’ liquidity needs. firms were able to use their liquid assets or undrawn credit lines to meet part of these needs. but given the scale of the shock, in many cases these buffers proved insufficient. in consequence, to meet their remaining liquidity needs, firms sought new funding. the result has been an increase in the demand for credit, in a setting in which lenders ’ risk perception has increased. according to the results of microsimulations made by the banco de espana, 68 % of spanish firms will record liquidity shortfalls3 in 2020,