MNI: Bank of Spain Sources: Fiscal rigour key as ECB tightens

--Spain Ready For QE End

--Catalonia, Trade Tensions, Brexit Could Pose Threat

By Silvia Marchetti

     MADRID (MNI) - Spain's economy will weather the end of European Central

Bank quantitative easing and a rise in interest rates so long as the government

maintains fiscal discipline and Catalan tensions remain subdued, Bank of Spain

sources told MNI.

     In an exclusive interview the sources said that while monetary policy

normalisation shouldn't damage growth, any fiscal indiscipline could amplify the

effects of ECB interest rate hikes from the second half of 2019. The comments

came after Spain's new Socialist government boosted its 2018 fiscal deficit

forecast to 2.7% of GDP, from 2.2%, and its 2019 forecast to 1.8% from 1.3%.

     Economic recovery over the past three years has boosted the country's

resilience, the sources said, noting how the ECB's "very gradual" normalisation

process had helped limit "undesirable market reactions and abrupt changes in

financial conditions."

     "In this context, and also taking into account the cyclical position of the

Spanish economy, it is hard to anticipate any significant setback to growth and

fiscal targets in the next few years derived from monetary policy actions," the

sources stressed.

     --FURTHER REFORM NEEDED

     In its latest quarterly report, the Bank of Spain estimated that a 100 bps

rise in short- and long-term interest rates would increase government net

interest payments by 0.3% of GDP, and corporate payments by 0.35% of GDP.

     "In the case of the general government, given the predominance of

long-term, fixed-rate financing, the impact of an interest rate rise on its net

interest burden would be quite gradual," the sources said. Businesses would be

more sensitive to increases in the short end of the yield curve, reflecting the

prevalence of floating rate, near-dated maturity financing.

     Growth risks are broadly balanced in the near term. But the fiscal deficit,

at 3% of GDP in 2017, and the public debt-to-GDP ratio of close to 100% are

"still at significantly high levels" and need be reduced in the short term.

     "Structural reforms are needed, as the economy still presents elements of

vulnerability, including high public indebtedness and the still-high net debtor

position of the nation, despite the recent current account surpluses," the

sources said.

     --CATALONIA CONCERNS

     Further "downside risks could stem from a resurgence of tension in

Catalonia, which may negatively affect consumer and investor confidence" with a

follow-through impact on the overall economy.

     A harsher-than-expected Brexit and global trade disputes could also sap

economic performance, though on a smaller scale.

     However the overall outlook remains positive.

     --UPBEAT

     Despite monetary normalisation, Spain's expansion is expected to continue

over coming years, after slowing but still strong growth rates since 2015.

     "The economy has become more competitive and resilient, partly due to the

impact of a number of structural reforms during the crisis, in a context in

which a significant progress has been made in correcting some of the prevailing

macro-financial imbalances," the sources noted

     Key factors, they said, were private sector deleveraging and the

achievement of persistent current account surpluses.

     Steps in the broader eurozone, including progress towards banking union and

the strengthened role of the European Stability Mechanism, are also contributing

to helping avoid "episodes of financial fragmentation in the euro area," the

sources said.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

--MNI London Bureau; +44208-865-3829; email: Jason.Webb@marketnews.com

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