Blog Post

Spain: a tale of two crises

In March, Jean Pisani-Ferry and I documented a significant capital flight affecting the euro-area periphery. The flight started in Greece, spilled over to the other programme countries and eventually reached Italy and Spain during summer 2011. The latest data shows that the situation is becoming extremely serious in Spain, where capital outflows since April 2011, […]

By: Date: November 9, 2012 European Macroeconomics & Governance Tags & Topics

In March, Jean Pisani-Ferry and I documented a significant capital flight affecting the euro-area periphery. The flight started in Greece, spilled over to the other programme countries and eventually reached Italy and Spain during summer 2011. The latest data shows that the situation is becoming extremely serious in Spain, where capital outflows since April 2011, when the acute phase of the crisis started, have reached 30% of pre-crisis GDP.

Figure 1 – Cumulative capital inflows (% 2007 GDP)

Note: data from national authorities. Capital flows are cumulated on the 2001 international investment liabilities

This is not the first time that Spain has experienced a sudden stop, and looking at capital flights in an historical perspective is enlightening. Applying the methodology generally used for the formal test of sudden stops[1] to monthly financial accounts data for 1990-2012, I can identify an earlier sudden-stop episode during the Exchange Rate Mechanism (ERM) crisis of 1992-1993[2]. Figure 2 compares this with the current episode, in terms of duration and size of capital outflows.

Figure 2a – duration of sudden stops

Figure 2b – magnitude of sudden stop

Note: own calculation on data from national sources. Pre-crisis GDP is 1991 for the first sudden stop episode and 2007 for the second one.

The size of the capital outflow experienced by Spain since July 2011 is unprecedented. During the 1993 sudden-stop phase, monthly capital outflows[3] amounted on average to 0.24% of pre-crisis GDP, whereas during the 2011 episode the corresponding figure reached 3.3%, showing how devastating the loss of investors’ confidence can be in a world of perfect financial integration and no capital controls[4].

The difference in terms of duration is no less striking. During the ERM crisis, Spain went through several tense moments. First it had to devalue by 5% on “Black Wednesday” (16 September 1992), following the abandonment of the ERM by Italy and the UK. A second 6% devaluation took place after the Swedish Riksbank decided to float the Krona, on 19 November 1992. Lastly, the peseta came under the strongest pressure in early 1993. In April 1993 the currency was quoted at its lowest level since Spain entered the ERM, forcing a third devaluation by 6.5% in May[5] (Buiter et al, 1998). Overall, the sudden stop of 1993 lasted eight months. The episode that started in July 2011 has been going on for 12 months already, and recent data shows no sign that the pace of capital outflow is abating.

Figure 3 – Eurosystem Liquidity

Note: data from national sources

Unlike 1993, Spain has access this time to a powerful absorption mechanism: Eurosystem liquidity provision, on which Spanish banks have become increasingly reliant during 2011/12 (Figure 3). As of July 2012, the Spanish banking system had borrowed via main and longer-term refinancing operations as much as €402 billion, i.e. about 30% of total Eurosystem liquidity provision. This is mirrored in the steady deterioration of the – by now famous – TARGET2 balance.

The long denial and the disorganised management of the problems in the banking system, the overshooting of central government fiscal targets and the lack of clarity and transparency about the fiscal positions of the regions, led to a loss of trust in Spain on the part of private investors. As a consequence, private capital is fleeing and the country is becoming more and more dependent on Eurosystem support. Unlike foreign exchange reserves in 1993, the compensating function of TARGET2 balances is virtually unlimited. But it does not mean that this precarious equilibrium will remain stable. After the European Central Bank decisions of 6 September, the Spanish bond market seems to be experiencing some relief. This should not lead to the gravity of the overall situation being overlooked. Stopping the confidence crisis is crucial, and addressing the underlying causes of investors’ mistrust is essential for private capital to return. Allowing the absorption power of the ECB to work in full – including with the new OMTs – may help. The impact of the announcement effect has been positive, but stems from market expectations, and as such might be short-lived. The OMT is necessarily conditional to a request for help being made. Without Spain making the first move, the ECB cannot act. The relief on the Spanish yields is therefore a sign that investors expect Spain to recognise the unsustainability of the present situation, and to make use of all the instruments at its disposal (once the conditions attached to them are clarified).

[1] Described in Calvo et al (2004). I apply the same criteria as in Merler and Pisani-Ferry (2012) and consider only episodes that lasted for longer than 3 months.
[2] Consistently with Calvo et al (2004), who also identify a sudden stop for Spain during the ERM crisis in 1992-93.
[3] Measured as the change in capital flows with respect to the same month of the previous year
[4] Capital controls were abolished in February 1992, but they were reintroduced temporarily in September 1992 and definitely abolished at the end of 1992. This was compatible with the Single Market legislation that allowed countries to use temporarily capital controls in order to deal with disorderly exchange rate markets – see Buiter et al (1998)
[5] This is the episode identified in figure 2. Unfortunately we cannot investigate the existence of sudden stops in 1992 due to data limitations (the way the test for sudden stop is constructed implies that the first 3 years of observations are lost).


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article Download PDF

Policy Brief

Screen Shot 2017-02-17 at 16.42.38

Europe in a new world order

In this paper the authors explore what the EU’s strategic reaction should be to US diminishing giant policies, and the EU’s role in a world of declining hegemony and shifting balances

By: Maria Demertzis, André Sapir and Guntram B. Wolff Topic: European Macroeconomics & Governance, Global Economics & Governance Date: February 17, 2017
Read article More on this topic

Blog Post

Zsolt Darvas
DSC_0798
dsc_1000

The Brexit bill: uncertainties in the estimate of EU pension and sickness insurance liabilities

Pension and sickness insurance liabilities for EU staff could be an especially contentious part of negotiations on an EU-UK financial settlement: the “Brexit bill”. This post looks behind the calculation of the alleged cost of pension benefits and concludes that it may be less than half of what it seems.

By: Zsolt Darvas, Konstantinos Efstathiou and Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: February 17, 2017
Read article More on this topic

Blog Post

Zsolt Darvas
DSC_0798
dsc_1000

The UK’s Brexit bill: could EU assets partially offset liabilities?

The ‘Brexit bill’ is likely to be one of the most contentious aspects of the upcoming negotiations. But estimates so far focus largely on the EU costs and liabilities that the UK will have to buy its way out of. What about the EU’s assets? The UK will surely get a share of those, and they could total €153.7bn.

By: Zsolt Darvas, Konstantinos Efstathiou and Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: February 14, 2017
Read article More on this topic

Blog Post

MariaDemertzis1 bw
unnamed

The impact of Brexit on UK tertiary education and R&D

In this blog post, we look at the impact of Brexit on UK’s education and research and development sectors in terms of students and staff, as well as funding.

By: Maria Demertzis and Enrico Nano Topic: European Macroeconomics & Governance Date: February 14, 2017
Read article Download PDF More on this topic

External Publication

Screen Shot 2017-02-13 at 12.31.18

Improving the Responses to the Migration and Refugee Crisis in Europe

What must be done to over- come the intra-European conflict and achieve a bal- ance that produces common ground allowing for a po- litical and social consensus on migration?

By: Massimo Bordignon, Yves Pascouau, Matthias M. Mayer, Mehrdad Mehregani, Demetrios G. Papademetriou, Meghan Benton, Pedro Góis and Simone Moriconi Topic: European Macroeconomics & Governance Date: February 13, 2017
Read about event More on this topic

Upcoming Event

Mar
22
11:30

Conversations on the future of Europe

On the occasion of the 60th anniversary of the signing of the Treaty of Rome, we will hold an event of four conversations between Bruegel scholars and European thinkers.

Speakers: Maria Demertzis, Emmanuel Mourlon-Druol, Johanna Nyman, André Sapir, Catherine Schenk, Guntram B. Wolff, Andre Wilkens and Ivan Krastev Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author

Blog Post

Zsolt Darvas

Questionable immigration claims in the Brexit white paper

The UK government's white paper on Brexit suggested that the EU's "free movement of people" has made it impossible to control immigration. This seems to rest on an assumption that EU citizens can "move and reside freely" in any member state. Zsolt Darvas finds these arguments problematic, and points out that it is difficult to infer public opinion about immigration from the referendum result.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: February 8, 2017
Read about event

Past Event

Past Event

Brexit and trade: what EU and WTO rules imply

Bruegel in collaboration with Leuven Centre For Global Governance Studies organizes an event at which we will discuss the options for redesigning trade relations in the post-Brexit era.

Speakers: Viktoria Dendrinou, Hosuk Lee-Makiyama, Petros C. Mavroidis, André Sapir and Prof. Jan Wouters Topic: European Macroeconomics & Governance, Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: February 6, 2017
Read article More by this author

Blog Post

ECB Board Members - Benoît Cœuré, Mario Draghi, Peter Praet, Sabine Lautenschlaeger, Vitor Constancio, Yves Mersch

Resolving Europe’s NPL burden: challenges and benefits

Keynote speech by Vítor Constâncio, Vice-President of the ECB, at Bruegel event: "Tackling Europe's non-performing loans crisis: restructuring debt, reviving growth", Brussels, 3 February 2017

By: Vítor Constâncio Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: February 3, 2017
Read about event

Past Event

Past Event

Tackling Europe’s non-performing loans crisis: restructuring debt, reviving growth

How can we connect the different initiatives for NPL resolution and identify an agenda that is shared between EU, national authorities and the private sector.

Speakers: Corso Bavagnoli, Iker Beraza, Arne Berggren, John Berrigan, Marco Buti, Vítor Constâncio, John Davison, Maria Demertzis, Sharon Donnery, Inês Drumond, Giorgio Gobbi, Piers Haben, Boštjan Jazbec, Gert-Jan Koopman, Alexander Lehmann, TJ Lim, Brendan McDonagh, Reza Moghadam, Ajay Rawal, Emanuele Rosetti Zannoni, Dirk Schoenmaker, Carola Schuler, Julien Wallen, Thomas Wieser and Guntram B. Wolff Topic: European Macroeconomics & Governance, Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: February 3, 2017
Read article Download PDF More on this topic

Policy Contribution

Capture

Making the best of the European single market

Now more than ever, the EU needs to address concerns about the significant decline in productivity growth and the increasing perception of unfairness. Completing the single market would unlock the EU's growth potential. At the same time, the EU should empower member states to fight inequality by helping them better distribute the gains arising from economic integration.

By: Vincent Aussilloux, Agnès Bénassy-Quéré, Clemens Fuest and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: February 2, 2017
Read about event More on this topic

Past Event

Past Event

Europe’s growth champion: will Poland’s success continue?

An event at which Marcin Piatkowski will present the key messages from a book on Poland that he is writing for Oxford University Press.

Speakers: Dan Bucşa, Maria Demertzis, Alexander Lehmann, Marcin Piatkowski and Paweł Samecki Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: January 31, 2017
Load more posts