Why Spain’s Economy is Not (Necessarily) Sinking

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MetalMiner welcomes guest commentary from Pepe Valderrama of Fullstep.

Recent media coverage paints a dreadful picture of Spain’s current economic condition and outlook. Years of excess growth based on an enormous housing bubble and fueled by unusually loose monetary conditions — which burst in 2007 — seem to have brought the country to its knees.

Part of the banking system is currently being bailed out, unemployment at nearly 25 percent is the highest of any developed economy, and recession forecasts set out a seemingly impossible path for recovery. But look deeper and further and you can imagine a different outcome for the country of the bulls, the fiesta and the siesta.

As sourcing and procurement specialists, we have and continue to live the experience of Spain’s companies from all sectors, quickly restructuring and aggressively cutting costs. In manufacturing, asset and capital management, banking and even in the government sector, we are carrying out accelerated cost reduction programs to help optimize spend through all purchasing categories.

So is Spain’s economy indeed doing better, not worse?

Spain has introduced important reforms over the past months. Two labor reforms have changed the employment context, lowering absurdly high layoff costs and changing the collective bargaining framework, giving unprecedented flexibility in the negotiating capabilities of companies and employees.

Spain’s current account deficit has practically been corrected, reducing external financing needs of 10 percent of GDP in 2007 to less than 2 percent in 2011. Families are steadily deleveraging and still show robust repayment capacity. Spain’s export sector is behaving as one of the world’s most dynamic — Spanish exports grew by 17 percent in 2011, increasing the share of exports as percentage of GDP to levels similar to those of France, Italy or the UK.

Government debt — though it has significantly increased in the past four years — is, at around 70 percent of GDP, still below the levels of most European countries, including Germany. The banking bailout loan currently being negotiated (which will foreseeably increase public debt to 80 percent of GDP) responds mainly to the need of obtaining cheaper financing than what is currently available in the debt markets, given the jitteriness of these, which is based more on the whole euro and European situation, than particularly on Spain’s situation.

The banking sector is still undergoing brutal reforms. The 48 banks and cajas (savings banks) that made up most of Spain’s financial sector in 2009 had been merged into 11 by March 2012. Further consolidation is underway. Another important aspect that is generally overlooked by the US media is that unlike in the US, mortgages in Spain carry personal guarantees, so even if house prices keep falling, homeowners cannot walk away and will keep on supporting most of the housing debt as they have done until now.

Fullstep has had the privilege of actively participating in this consolidation process, designing and executing aggressive cost reduction and negotiation plans of some of the latest mergers, including Banca Civica, now integrated in Caixa Bank, Banco Sabadell, Bankinter or Liberbank, and we can say with certainty that the transformation is really underway.

The combination of high unemployment and the new labor reforms have made Spain a world-class opportunity to capture excellent talent at incredibly competitive costs.

The Economist’s June 10 special report on International Banking pointed out Spain as having “arguably the world’s most competitive banking market” and some of the world’s most efficient banks. Spain can certainly compete in other sectors as well.

So could it be that much of the media misunderstands what sinking really means, as this poor German Coast Guard officer does?

It would be naïve to write off Spain just yet.

–Pepe Valderrama

Note: Fullstep is an associate sponsor of MetalMiner.


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