Spanish Treasury's Director General Soledad Nunez
The Economic Observer: What are your responsibilities?
Soledad Nunez: We're in charge of the budget and all the areas related to financial regulations, we make the laws. Those are the two main functions. Aside from that - we also monitor the financial markets, the banking sector and also issues related to financial stability. We're also in charge of regulations related to anti-money laundering.
The Economic Observer: Congratulations on the successful bond launch.
Soledad Nunez: What about today, we had a better one. We had a syndication today for 10-year bonds, there was a huge demand.
The Economic Observer: How much did they cost?
Soledad Nunez: The cost has risen, but still our interest payment balance is still very affordable. It's true that the spread against the German bonds has increased a lot over recent months, but while half of this increase has been due to the increase in yields of Spanish bonds (real increase), the other half has been caused by a drop in the German bond yield.
This means that in actual levels, the bond yields have not increased so much. For example, at the end of the year, the level was approx 4.6, and now it's 4.8 or something. It was 3.98 in Dec and was 4.66 today - so, since the beginning of the year, it has increased a lot - 80 or 90 basis points. But in levels not so much, so although it's increased, this increase is still very affordable.
The Economic Observer: With the drop in the number of banks relying on the European Central Bank - does these mean the banks are turning to the bond market as a source of funding?
Soledad Nunez: The banking market really hasn't been working properly since the crisis started. To put it in a nutshell: I'm not worried.Of course I'd like the interbank market to work better, but it's now at its worse and I hope that it will get better soon.
The Economic Observer: Is there a way out of Spain's economic dilemma (high unemployment + high deficits)Soledad Nunez: Over 2010/11, the way out is dependent to an extent on external growth. Our assumption is that we'll maintain our share of world exports. Which means, that if global trade begins to increase, we should be able to reap benefits from that. Another factor to consider is domestic consumption. Right now our savings rate is rising - the historical average is around 10-11%, now it's about 18%, down a little of its 19% peak.
But why the spike? People had to save to pay down debt - precautionary savings. But as confidence gains, these higher saving rates are likely to gradually decrease. And this is the other assumption that we make. So if the savings rate were to retreat to say 15% this should help to left consumption.
The Economic Observer: One question about investment from Asia, you said it accounts for about 20%...Soledad Nunez: It's about 10% of our total debt. So, 50% of our debt is in the hands of non-residents. Of that 50%, one-fifth is held by Asian investors from a range of countries and regions including - China, Japan, etc.
The Economic Observer: On the ratings agencies...Soledad Nunez: Moody's has not down-graded us yet, we're in the review process. We're going to show Moody's that there is no need to downgrade us.
The Economic Observer: What's the role of rating's agencies?Soledad Nunez: Sometimes it seems that they follow the market rather than the market following them.They move because of the movement of the markets. Sometimes ... And not all of them ... And not all of them have the same quality of analysts.
The Economic Observer: To turn to the topic of labor reform - The recent announcement of a plan to reduce the required severance pay from 45 to 33 days, some analysts argue that, although it's a positive step, this doesn't go far enough and that it's still to expensive. How do you judge the current labor reform?Soledad Nunez: I think it's a good reform. The new policy does more than simply reduce the number of days wages to be paid to workers who have been laid off. It also adds flexibility to the labor market in terms of collective bargaining - which is a very important issue. Right now, the collective bargaining system locks many firms into situations that are very difficult to escape. With this new law, there is more flexibility for the firm. So they don't simply to accept a "sector-wide" contract.
So right now, although they plan to reduce the time to 33 days, there's already a regulation that allows a firm to take their case to arbitration. If the enterprise is in trouble, they can make a request to a judge so that they only have to pay 20-days worth of severance pay. However, this system is unpredictable in that it relies on the verdict of judges. Now, with the new law, it's easier to do this - as the law gives more clarity to the judges in regard to what grounds they can refuse a request.
The Economic Observer: Is it time for Europe to abandon the "social welfare" model?
Soledad Nunez: No, I don't think we will and neither should we abandon the current system. Although our labor market is not working properly, it's obvious that this needs to be reformed. We have an unemployment rate of almost 20% and whenever we have a crisis, the unemployment rate spikes. Our best unemployment rate ever (since the 70s) was 8%, which is still very high. So, it's obvious things are not functioning and that we need to reform the labor market. But that doesn't mean it's the end of the welfare state. We have a well-functioning social security sector.We also have unemployment insurance, and most of the unemployed are covered by unemployment insurance.
So this is not exactly welfare - as they pay for their own payments when they work. But to look at the broad welfare system, it's not in danger at all. The pension system is not in danger either. Though it will be reformed - so that retirement ages are raised.
The Economic Observer: So you can confidently tell your potential Chinese investors that everything is ok?
Soledad Nunez: The review will be complete at the end of September.
By then we'll have:
- published the results of the stress test.
- show we can issue bonds and have demand
- passed the labor market reform in parliament and it will be in the process of being implemented
- passed the budget for 2011 and shown our commitment to a 6% deficit target
- begun banking reform including regulatory reform.
