Wednesday, April 09, 2008

The Spanish Government Response To The Crisis

The Spanish government is preparing a 22 billion euro ($34.38 billion) stimulus package as a response to the economic problems the country is facing. This was the substance of the statement by José Luis Rodríguez Zapatero, Spain’s acting prime minister, to the Spanish parliament yesterday. The package constitutes the new government's response to its electoral promise of emergency measures to reactivate Spain's faltering economy, which has been severely affected by the sudden collapse of construction activity after a 10-year property boom and the continuing turmoil in global financial system which has meant the international wholesale money markets effectively remain closed to mortgage backed securities issued by Spanish banks.

Outlining his government’s priorities for the next four years, Zapatero told the Spanish parliament he would speed up government infrastructure projects such as high-speed train links, promote more state-subsidised housing and extend government guarantees for some mortgage securitisations. Property developers with unsold stock are going to be able to place their empty homes with a state rental agency, and there will be retraining schemes for tens of thousands of unemployed construction workers. Spain's new government will also ramp up home-building programs and offer mortgage-repayment relief as part of a U.S.-style fiscal-stimulus package.

The roughly €22 billion ($35 billion) plan, representing about 0.5% of gross domestic product, aims to ease the bite of the credit crunch on debt-laden households that has brought the Spanish housing sector to a virtual standstill.

"Our government will immediately, as soon as it is constituted, take measures to counter the economic slowdown," Spanish Prime Minister-Elect José Luis Rodríguez Zapatero said in Parliament, which is set to approve his nomination this week.

Zapatero promised his government would build 1.5 million new price-protected homes for low income families in order to offset a sharp drop in home-building activity. He said he would also like to make it easier for homeowners with difficulties to meet their mortgage repayment obligations to extend the terms of their loans.

In his speech, Zapatero also pledged a 400-euro rebate for tax payers, speedier payment of VAT rebates for businesses and tax breaks to encourage Spain's struggling construction sector to renovate old town centres. He also announced a programme to help building workers find new jobs and a plan to meet unions and business leaders to find ways to boost productivity.

Zapatero announced an ambitious public works programme, including the idea of putting millions of euros into building 150,000 affordable homes a year in an effort to sustain a now very beleagured construction industry.

Despite criticism that this is just a "short-fix" solution to deeper economic ills, the government will also invest in major road- and rail-building programmes.

There was however evident disappointment among many analysts that Zapatero failed to announce any new measures - other than those already included in the Socialist party's manifesto - to deal with a rapid deterioration in the economy since a general election last month. Some economists estimate the country is growing at only half the rate it was this time last year, when the economy was expanding at a 3.8 per cent rate. If the market for Spanish mortgage-backed securities continues to remains closed, growth could fall to just 1 per cent this year, according to some forecasts. If this were to happen unemployment would evidently rise sharply.

Spanish banks are reining in credit - particularly to builders and property developers - because they can no longer fund themselves in the international capital markets, and this has accentuated the crisis in the construction sector, once the motor for growth.

Although Mr Zapatero has promised to speed up infrastructure projects, economists say government spending will not be able to replace private sector investment in housing, which totalled 9 per cent of gross domestic product at the height of the construction boom.

The government draws confidence from a budget surplus which totalled 2.2 percent of gross domestic product last year. But falling tax revenues have already slashed that to 0.8 percent of GDP in the first two months of the year and the Bank of Spain has said that - even without government stimulus programmes - the surplus would virtually disappear in 2009 simply as a result of the slowdown.

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