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The increase in the external debt is covered via Eurosystem financing
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The private sector deleverages in 2011 while public debt continues to grow.
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Public sector and private debt revealed opposing trends in 2011. While indebtedness continued to grow at a fast pace in the first case, the deleveraging started two years ago continued in the second. There's no sign of a change in trend in the figures for 2012. Eurosystem liquidity injections have played an important part in the rise in public debt. With a view to 2012, it's of the utmost importance to dispel the uncertainty that has blocked traditional financing channels. In this respect, this year's reorganisation of the banking system will be crucial.
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The net lending of firms reaches 2.8% of GDP.
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In the case of the private sector, non-financial firms and households were net lenders in 2011, with a net lending equivalent to 5.1% of the gross domestic product (GDP). Although this figure is only 0.3 percentage points lower than the one recorded a year ago, significant differences can be observed in the breakdown of both sectors' net lending. In the case of households, this fell by 1.5 percentage points, reaching 2.3% of GDP. On the other hand, the net lending of firms increased to 2.8% of GDP last year, achieving the highest figure for the last decade. However, net lending in the private sector was not enough to offset the public administration deficit of 8.5% of GDP.
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The relative weight of ECB financing for external debt increases to 9.9% in 2011.
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The data available for the first two months of 2012 show that this trend has continued. Private sector debt fell by 13.6 billion euros during the first two months of the year, a 0.6% decrease on December 2011. However, public administrations increased their debt by 29.0 billion euros in the same period. Consequently, the total liabilities of non-financial sectors grew further, reaching a new record high in February.
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As can be seen in the graph below, this greater indebtedness also involved an increase in the volume of Spain's debt in foreign hands, totalling 1.8 trillion euros in December 2011. This rise has made the reduction process started a year ago simply anecdotal. But in addition to this trend, an analysis of external debt also shows a gradual increase in the Spanish economy's dependence on Eurosystem financing. In fact, at December 2011, Europe's top monetary authority was financing 9.9% of Spain's total external debt. This proportion represents an increase of almost 7 percentage points compared with 2010. On the other hand, the input of capital via traditional financing channels has halted significantly. This reflects the deterioration in confidence inspired by the Spanish market in foreign investors.
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This injection of capital by the European Central Bank (ECB) was carried out via three-year loans granted to European banks in December 2011 and February 2012. The financing difficulties of Spain's banking system meant that banks increased their net debt with the Eurosystem by 130 billion euros during the five months prior to March 2012. The percentage of external debt financed by the Eurosystem is therefore expected to continue rising during the first quarter of this year.
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Banks increase their net position with the Eurosystem by 130 billion euros.
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This extensive use of the Eurosystem has helped, on the one hand, to relieve banks' liquidity tensions and, on the other, has also allowed the financial system to acquire Spanish public debt. However, the squeeze on private sector credit continued at the start of 2012. Specifically, the volume of credit granted in the first two months of the year fell by 11.2% year-on-year, causing the outstanding credit balance to shrink by 3.0% in February compared with the same month last year. For its part, the non-performing loan (NPL) ratio rose by 25 basis points that month, reaching 8.16% of total credit. We expect this upward trend to go on increasing over the coming months, given the expected weakness of the Spanish economy.
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Within this context of deteriorating credit portfolios, Spain's banking system will have to comply with the new hedging requirements for its real estate assets, approved by the royal decree-law to reorganise the financial system. It is estimated that these measures will entail an additional 50 billion euros for the sector, approximately. At the end of March, financial institutions presented their strategies to ensure compliance with these new requirements by the end of 2012. Among these measures, of note are charges to profit and capital surpluses, asset divestments and the attraction of private capital. Mergers between banks, in which case the deadline to comply with these requirements is extended to December 2013, have only been announced in two cases.
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The outstanding balance of credit to the private sector falls by 3.0% year-on-year in February.
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In short, this new reorganisation of the banking sector is expected to help dispel doubts regarding banks' solvency in the medium term. This will reopen the traditional financing channels for banks and help to ensure credit is channelled to the different sectors of the economy, once it starts to recover.
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Term deposits portend further drops in savings
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Given this growing economic weakness, the savings rate of Spanish households fell again in the fourth quarter of 2011, down to 11.6% of their gross disposable income for the year as a whole. This figure represents a fall of 2.3 percentage points compared with the level of a year ago. This decline is due to the fact that the 3.0% annual rise in final consumption costs was higher than the rise in gross disposable income, namely 0.4% in the same period.
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Household savings fall to 11.6% of their gross disposable income in 2011.
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Comparisons with the previous quarter show a certain slowdown in the growth of final consumption. However, gross disposable income already fell in the same period. This performance contrasts with the one recorded during the last recessionary cycle, when the drop in final consumption preceded the fall in gross income due to the effect of precautionary savings. In that case, the household savings rate reached 18.5%. We expect that, throughout 2012, savings will continue to decline albeit at a slightly slower pace.
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Short-term deposits fall during the first two months of the year.
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The figures for bank liabilities in the hands of households and firms are in line with this forecast, falling by 1.2% year-on-year during the first two months of 2012. Of note is the squeeze in short-term deposits, which include sight deposits and savings, down 2.9% and 3.3% respectively in the same period. This drop is highly significant if we take into account the fact that short-term deposits provide the best reflection of the trend in the savings rate. By way of example, in December 2009, when the savings rate reached its peak, short-term deposits rose by 10.4% year-on-year compared with the 1.3% fall year-on-year in long-term deposits.
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