• LIVE: Last minute on the coronavirus

The coronavirus crisis that threatens the incomes of homes and companies will further highlight the imbalance that is dragging Spain's public accounts and its vulnerability to the dimension of an economic collapse that is currently unknown.

The Government's response to the pandemic will shoot the public deficit to double-digit levels and will place debt in the historical record of 115% of GDP, as the Executive and the Bank of Spain agree. For this reason, the supervisory body calls on President Pedro Sánchez to design a "fiscal consolidation and structural reform program" to launch it immediately when the situation returns to normal.

"Fiscal consolidation" is the euphemism that is used at the economic level to refer to adjustments, which can only be done by raising public revenues (that is, increasing taxes) or cutting spending that is less productive and reduces the country's competitiveness.

The Bank of Spain also takes advantage of its latest financial stability report, published this Monday, to slap the government's ears by remembering that in 2019 - despite the economy maintaining its growth - the public deficit rose to 2, 8%, and recalls that the improvements of the last six years have been mainly linked to the increase in GDP and the reduction of financial rates in Europe. In this way, he warns that the structural deficit of the economy - outside the economic cycle - was at the end of 2019 in the "high" environment of 3% . In other words, the State routinely spends much more than it enters.

"The high levels of structural deficit to start with and the increases in public debt that will foreseeably be achieved, together with the challenges for public finances that stem from the aging of the population, highlight the vulnerability of Spanish public finances to possible shocks additional in the economic activity, in the financing costs or in the sentiment of the investors ", indicates the report of the financial regulator.

The notices of the body directed by Pablo Hernández de Cos are not free. In fact, his analysis warns that the strong increase in countries' financing needs to face Covid has already had a first reflection on sovereign risk premiums. This indicator, an old acquaintance of the Spanish economy, measures the extra cost that a country pays for its debt against Germany, a country considered by much more solvent investors. Since February, the Spanish premium has shot up by 64 basis points with respect to the German economy and exceeds 130 points.

Only the battery of liquidity measures put in place by the ECB have alleviated this situation. "In the financial markets of the Economic and Monetary Union (EMU), sovereign risk premiums have expanded, albeit moderately due to the action of the ECB. This movement reflects the perspectives about the negative impact of the health crisis on public deficits, as well as the general climate of uncertainty and the greater risk aversion of investors, "he warns.

For this reason, the Bank of Spain considers it essential that this support be maintained in the short term and that there be a greater response from the European institutions with the activation of funds such as the Mede or a private one for reconstruction , as Sánchez requests. "Among other possible new instruments that may be required, priority must in any case be given to those that strengthen the capacity of the EU as a whole to favor adequate financing conditions with which to bear the high costs of the crisis, as well as the repair of the growth capacity of all the Member States damaged by the pandemic, "support the Spanish central bank.

"A transitory crisis"

The regulator's forecast is that the economic crisis that plagues the entire planet will be "transitory", although a lack of response from the administrations may turn its effects into "permanent" with the disappearance of companies and the consequent increase in unemployment levels.

Spain reaches the coronavirus crisis in better financial conditions than in 2008, with households and companies much less indebted and banks more healthy to serve as a cushion, as the regulator itself proposes, and become " key elements of the response to the pandemic. "

"Spanish companies face this shock with a more favorable financial position than before the global financial crisis, but there are vulnerable segments. Spanish non-financial companies have substantially reduced their debt levels in recent years. However, the magnitude of the shock it is very significant and segments of the Spanish corporate sector persist with a vulnerable position , "he warns with an eye toward the great weight of the tourism and hospitality sector in the national GDP.

In relation to banks, the regulator warns that they reach the crisis with low profitability due to the prolonged scenario of low interest rates in Europe and a capacity to generate profits that is considerably lower than what they had in 2008. However, their levels Solvency ratios have been strengthened after regulatory tightening in recent years and, today, they could face the increase in delinquencies expected by both households and companies.

"It is estimated that the release of mattresses allowed by the prudential response to the crisis would be sufficient to cover an increase in the default rate of around 8.2 points , which rises significantly when the positive effect of moratoriums and government guarantee program for companies. The sum of all these capital resources could cover a loss volume equivalent to almost twice the current volume of doubtful credit in the system, "the report concludes.

In this sense, the regulator expects defaults to start with consumer loans after the strong increase in this segment registered in recent years. If the crisis persists, the supervisor believes that these defaults will be extended to the payment of basic supplies, ultimately reaching the mortgage bills.

According to the criteria of The Trust Project

Know more

  • GDP
  • Spain
  • Europe
  • Germany
  • Coronavirus
  • Covid 19

InterviewArancha González Laya: "Outbreaks of populism will delay the way out of the crisis"

EmpresasBanca and ICO finalize the largest credit with public guarantee to Barceló in the midst of the tourist crisis

Crisis The fall of oil, great news for Spain (if there were no coronaviruses)