As is well known, Spain’s current system for valuing assets is highly demanding, both in terms of the criteria for classifying assets as troubled and in terms of provisioning and write-downs. One example would be the treatment of savings banks’ exposure to the construction and real-estate development sector. The total amount of this exposure is € billion, of which 28 billion (13%) is made up of doubtful assets. That said, the requirements of the Banco de España force the banks to also record as potentially troubled investments, and make the necessary provisions for, assets acquired in payment of debt, as well as standard loans under surveillance owing to some observed weakness, even if payments are up to date. As a result of these rigorous asset classification criteria, as at 31 December 2010 savings banks were obliged to recognise € billion of potentially troubled lending to construction and property development, i.e. 46% of their total loans and receivables in this sector. This gives an idea of the transparency efforts made, which have been far beyond those required in other parts of the world. Accumulated specific loan loss provisions represent 31% of these “extended” troubled assets, and if we add the general provisions this percentage reaches 38%.
Perhaps the most natural explanation for the fact that inflation in the 1990s has been lower than its historical relationship with growth suggests, seems to be the markedly lower inflation expectations. This is also indicated by data from studies at the Riksbank. From a level between 6 and 8% in the 1970s and 1980s, in recent years expectations of longer-term inflation have gradually moved down to about 2%. This is an impressive change that stems in the main from regime shifts in various fields that have been achieved since the late 1980s. Furthermore, it looks as though expectations are now anchored relatively firmly in the vicinity of that level. Once a low-inflation regime has been established and people count on price increases being low in the longer run, the rate of inflation is determined mainly by the demand situation in relation to production capacity. During a process of disinflation, however, low capacity utilisation and falling inflation expectations both exert a downward effect on actual inflation. This can give the impression that the relationship between demand and inflation has changed. In that the pattern in the 1990s has been dominated by the reduction in expected inflation, the partial relationship between demand and inflation has been difficult to analyse, not least because it is hard to arrive at statistical measurements of the output gap, structural unemployment and their impact on the inflation process. Still, the hypothesis that inflation’s sensitivity to resource utilisation has changed from the 1980s to the 1990s does seem to have some support.