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 Topic: European Macroeconomics & Governance

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.


Warning: Invalid argument supplied for foreach() in /home/bruegelo/public_html/wp-content/themes/bruegel/content.php on line 449
View comments
Read article More on this topic

Blog Post

Brexit, phase two (and beyond): The future of the EU-UK relationship

Whether it looks more like ‘CETA-plus’ or ‘EEA-minus’, the trade deal that emerges from phase two of the Brexit negotiations should not be the limit of ambition for future partnership between the EU and the UK

By: Maria Demertzis and André Sapir Topic: European Macroeconomics & Governance Date: December 13, 2017
Read article More on this topic More by this author

Blog Post

The challenge of fostering financial inclusion of refugees

Creation of a European identification for refugees and a pan-European registry would encourage better financial inclusion, along with clear guidelines about financial regulation and public-private partnerships

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: December 13, 2017
Read about event More on this topic

Past Event

Past Event

Better policies for people on the move

This event will discuss the impact and integration of migrants as well as national and European immigration policy challenges

Speakers: Manu Bhardwaj, Elizabeth Collett, Zsolt Darvas, Eva Degler, Maria Demertzis, Arjen Leerkes, Rainer Münz, Matthias Oel, Alessandra Venturini and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: December 13, 2017
Read article More on this topic More by this author

Blog Post

Support for intra-EU mobility of people is on the rise

Europeans’ enthusiasm for immigration from other EU countries is steadily increasing –two-thirds of the EU population, on average, now support it.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: December 12, 2017
Read article More by this author

Blog Post

Latest data shows developing trends in the European Central Bank’s refinancing operations

The stock of liquidity supplied through the ECB’s open market operations has remained relatively stable, though there is a clearer change in the country composition.

By: Konstantinos Efstathiou Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: December 12, 2017
Read article More by this author

Blog Post

The DSGE Model Quarrel (Again)

Dynamic Stochastic General Equilibrium models have come under fire since the financial crisis. A recent paper by Christiano, Eichenbaum and Trabandt – who provide a defense for DSGE – has generated yet another wave of reactions in the economic blogosphere. We review the most recent contributions on this topic.

By: Silvia Merler Topic: European Macroeconomics & Governance, Global Economics & Governance Date: December 11, 2017
Read article More on this topic More by this author

Blog Post

Sovereign Concentration Charges are the Key to Completing Europe’s Banking Union

The past crisis revealed that most euro-area banks have disproportionate sovereign exposure in their home country. Charging banks for sovereign concentration is one solution to this issue, and would help advance the discussion on banking union.

By: Nicolas Véron Topic: European Macroeconomics & Governance Date: December 7, 2017
Read about event More on this topic

Past Event

Past Event

Health care and macro-economics in Europe

What are the strengths and challenges of health care systems in each EU country? What are the common policy priorities and opportunities for EU value added?What role do healthcare systems play in public finances and macroeconomic developments? What are the economic values of investing in healthcare?

Speakers: Zsolt Darvas, Caroline Costongs, Per Eckefeldt, Sylvain Giraud, Petra Laux, Xavier Prats Monné and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: December 7, 2017
Read article More on this topic

Blog Post

Promoting intra-regional trade in the south of the Mediterranean

Regional integration is still a sure way for economies in development to achieve economic growth on the global market. The south of the Mediterranean has still a low level of intra-regional trade integration, dominated by some overlapping trade agreements and political instability. The EU has the opportunity to play a decisive role, promoting and coordinating the process.

By: Filippo Biondi and Maria Demertzis Topic: European Macroeconomics & Governance Date: December 6, 2017
Read article More on this topic More by this author

Blog Post

The eurozone medley: a collection of recent papers on the future of euro-area governance

Our scholars Grégory Claeys, André Sapir, Dirk Schoenmaker, Nicolas Veron and Guntram B. Wolff, explore the next steps needed to create a more functional and coherent economic governance framework.

By: Bruegel Topic: European Macroeconomics & Governance Date: December 6, 2017
Read article More on this topic More by this author

Blog Post

How the EU has become an immigration area

Natural change of EU28 population (the balance of live births and deaths) has fallen from high positive values in the 1960s to essentially zero recently, while the previous close-to-zero net immigration has turned positive and, since the early 1990s, become a more important source of population growth than natural increase

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: December 6, 2017
Read article More by this author

Blog Post

The European Union with the Community of Latin America and the Caribbean: where do we stand?

Latin American and Caribbean countries have deep historical, political, cultural, and economic ties with Europe, and cooperation between the two regions has been intensifying recently. Here we report some of the main trends in trade, foreign direct investment, and agreements between the European Union and The Community of Latin American and Caribbean States, the European Union’s official counterpart in the bi-regional strategic partnership that commenced in 1999.

By: Francesco Chiacchio Topic: European Macroeconomics & Governance, Global Economics & Governance Date: December 5, 2017
Load more posts