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Bullish Price Sequence

--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.
     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.
     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.
     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:
--MNI London Bureau; +44208-865-3829; email:
[TOPICS: M$X$$$,MC$$$$,MT$$$$,MX$$$$,M$$EC$]