Miguel Fernández Ordóñez: Economic developments and the financial sector – a Spanish perspective Speech by Mr Miguel Fernández Ordóñez, Governor of the Bank of Spain, at the 2008 International Monetary Conference – Central Bankers Panel, Barcelona, 3 June 2008. *  *  *  Ladies and Gentlemen, I would like to thank the International Monetary Conference for inviting me to participate in today’s Panel. We meet at a moment when we are confronted with particularly difficult challenges, in the wake of substantial economic shocks. I would like to take advantage of the opportunity to comment on these challenges from the Spanish perspective. I will first focus on economic developments, and then turn to the financial sector. The Spanish economy began to show some signs of a slowdown in early-2007, after more than a decade of robust expansion. The slowdown preceded the recent financial turmoil. The deceleration in domestic demand arose as a result of the gradual tightening of monetary policy since 2005, and of a moderation in house prices. The residential investment sector has suffered a particularly intense slowdown, entering into a period of adjustment after a protracted boom. The containment of domestic demand has been more pronounced since mid-2007, when the turmoil emerged. The slowdown has eroded consumer and business confidence. It is already having an impact on the spending decisions of households and firms. We are seeing signs that credit conditions are tightening, as a consequence of the reappraisal of risks and changes in macroeconomic and sectoral expectations.
We need to see increased dynamism, particularly in those sectors which are not as directly affected by the current slowdown. Other measures are also necessary, such as liberalisation and deregulation policies, to improve competitiveness. Policies aimed at improving the human capital of our workers and increasing labour mobility should also be encouraged. Finally, a comment on fiscal policy. The current fiscal situation in Spain is sound, having ending 2007 with a budget surplus and reduced public debt. Indeed, let me recall that our public debt to GDP ratio, at 35%, is the lowest among the big EU countries. It is important to maintain this stance in the face of the current slowdown. Expansionary demand policies could prove counterproductive. We should avoid a deterioration of the budgetary situation beyond that implied by automatic stabilisers. Let me turn now to the financial sector. So far, the impact of the recent turbulence on financial stability in Spain has been limited. This is largely thanks to the actions of the banks themselves, who have not entered into the kinds of business that have been most directly affected. Spanish banks have demonstrated that you do not need to turn to the originate-todistribute model to become an efficient and profitable banking business. Plain vanilla, traditional business can be compatible with high returns on equity and efficiency. It also has the added value of implying greater stability. But I think that the Bank of Spain’s approach to supervision has also had a positive effect. Let me emphasise two key characteristics in this respect.