Brussels warns of risks to Spain from the crisis in emerging markets

The upbeat message Economy Minister Luis de Guindos gave to his colleagues at an Ecofin meeting on Tuesday on the Spanish economy contrasts with the more cautious tone of the final report on Spain’s compliance with the bailout program for its banks, made public on Wednesday by the European Commission (EC).

De Guindos told fellow European economy and finance ministers that he expects the economy to grow 1 percent this year, above the Spanish government’s official forecast of 0.7 percent, with the pace of activity sufficiently strong to allow net job creation. He also minimized the possibility of fallout from the latest crisis in emerging markets, particularly Argentina. “We can’t fall any more. Now the recovery begins,” De Guindos said, arguing that Spain “has scarcely any exposure to Argentina and other emerging markets.”

However, Brussels’ report, based on a joint mission by the EC and the European Central Bank to Madrid in the period December 2-13, warns that: “The economic recovery […] remains fragile as imbalances continue to be worked out, and subject to external risks such as a reversal of the current benign global financial environment and a slowdown in emerging markets, especially in Latin America, to which Spanish companies are particularly exposed.”

The report points to the Commission’s latest growth forecasts for Spain, which point to an increase in GDP of only 0.5 percent this year. “Going forward, the expansion of activity is expected to be moderate as high unemployment, balance-sheet adjustment and still relatively tight bank credit conditions for smaller borrowers will continue to weigh on growth.”

High unemployment, balance-sheet adjustment and still relatively tight bank credit conditions for smaller borrowers will continue to weigh on growth.”

Bank lending in Spain in November of last year contracted by an annual 8.5 percent. Lenders have also failed to pass on their own improved borrowing conditions to their clients. The Commission said that while the overall health of the banking sector has improved, margins remain weak, while the sector is still suffering from erosion in asset quality, with the non-performing loan ratio above 13 percent for the first time on record and unemployment expected to remain high. The correction in the real estate sector after a massive bubble burst some five years ago is still running its course.

Brussels also warned that the Sareb asset-management corporation, or so-called bad bank set up to absorb the toxic property assets of nationalized lenders, is estimated to have posted a loss in 2013, its first year in operation. The corporation needs to present a new business plan next month given that sales of acquired assets have been much slower than expected. “The macroeconomic scenario as well as projections for the evolution of real estate prices will have to be prudent enough in the context of still significant uncertainty with respect to the future evolution of the real estate market in Spain,” the report said.

The report also warns of “potential conflicts of interest” among the shareholders of Sareb, in which the government has just under 50 percent.