Category Archives: Spain

Spain

Massive Subsidies Endanger Spanish Energy Reform

Global Economy, On the cover, Sin categoría, Spain,
This article was published in El Confidencial on August 27th 2012 

“If technologies have economic merit, no subsidy is necessary. If they don’t, no subsidy will provide it”. Jerry Taylor.
“Governmental subsidy systems promote inefficiency in production and efficiency in coercion”. M. Rothbard

This week the press has highlighted the discrepancies between two of Spain’s top ministers regarding the much delayed electricity sector reform. The shares of many of the companies involved have moved between +7% and -6% depending on the words of one minister or another.
Let me begin by saying that I do not find anything wrong when a company hires a consultant to defend its interests and that, when they do, they do it with the best. And I believe this controversy creates a great opportunity for the government to demonstrate that their decisions are not influenced by one lobby or another, but focused on the only thing that matters: that Spain cannot continue destroying its competitiveness with a massively subsidized and inefficient energy sector, where the electricity bill has soared by 40% while demand fell and where excessive renewable subsidies count for 39% of the costs (excluding energy component) of the system.
renewables II
To eliminate the tariff deficit accumulated until 2012; electricity bills will have to go up by an estimated 35%.
The Spanish tariff deficit is the difference between the real system costs and those recognized in the tariff, where the result is an IOU from the government that is financed in the balance sheet of the companies until it is settled. This tariff deficit is part of the infamous “Spanish private debt,” which is in no small part made of outstanding commitments from the government and funded by the balance sheet of private companies. It is also the consequence of a highly optimistic central planning of the system that incentivised overcapacity and massive new build that has made companies more indebted, with or without acquisitions, and less and less profitable.
renewables I
The tariff deficit myths are:
– “Companies make billions out of it” We must differentiate between accounted and real profits. We sometimes forget that companies account for the tariff deficit as a “receivable” so their profit and loss is not made of real cash. As such they generate no free cash flow and borrow more and more. Investments in Spain, from generation to distribution, generate less than 7% return on capital employed. However, companies are told by governments to undertake massive investments, but without legal certainty or acceptable returns. And there is always someone willing to build more for less.
–  “It is a temporary problem that goes away with the latest measures.” The latest government measures to reduce the costs of the system seem to look to collect from the efficient and cash generating businesses to cover inefficiency errors, but these measures do not solve a problem of subsidies and overcapacity, as they have been mainly applied on one-off costs, with a maximum impact of 2 billion euros, yet they do not take into account that in 2013 renewables subsidies will rise by another 2 billion to almost 9 billion a year in 2014 due to the plants that are coming on stream, bringing the tariff deficit up again.
–  “Renewables are unfairly demonized.” This is true, in part. The tariff deficit is not an issue created by renewable energy, but by the excessive cost of certain subsidies-particularly solar photovoltaic- where massive premiums were given to build 400 megawatts, ending with 3000 megawatts built – the consequences of an extremely generous aid system and a poorly controlled approval system, where all regional governments gave permits to plants regardless of the 400MW limit. But who pays that “tiny” 5 billion per annum mistake?. No one has anything against renewable energy. I love to read that Spain will build nearly 600 megawatts in solar PV without subsidies. The problem in Spain is the accumulated upfront cost of those subsidies, the fact that the excess cost is not paid but deferred in the tariff, and the claim from some operators to continue with the same scheme of subsidies and installations when all 2020 targets have been fully met. Many renewable companies in Spain have followed a model of builder-developer entering a country, and maximizing capacity to move on and grow in others. But there is no eternal growth in each market.
– “Coal generates no deficit because it is a social cost.” Other subsidies maintain inefficient capacity alive, like coal, which gets 600 million a year. If the rationale to keep coal is “social” it should not accumulate costs to the power bill, but be paid by the regional governments like healthcare or social services. The problem is the habit of subsidizing outdated technologies while building up the deficit that is generated by other new technologies.
–   “The renewable subsidies are offset by the fall in wholesale prices.” The cumulative net reduction in wholesale power prices between 2005 and 2011 was less than 9.2 billion euros, according APPA- while accumulated subsidies to renewable energies shot to 25 billion in the same period. In any case, talking about the benefits of renewable energy on price is almost comical when the power tariff to consumers has risen almost 40% in four years.
–   “The tariff deficit is created by the manipulation of wholesale price by large utilities”. It would be the most disastrous manipulation ever, when wholesale prices have remained exactly in line with the energy mix, below Italy’s, France’s and Britain’s, and in line with Germany.
renewables III
–  “Nuclear and hydro should pay the deficit.” They do, but it makes no sense to use cheap sources of energy to subsidize more expensive ones. And let’s not forget the string of regional and national taxes that traditional utilities suffer.
–   “If nuclear capacity is shut down, there would be no overcapacity.” Sure, and if EDF and France dismantle their 58 nuclear reactors, there would not be any overcapacity there either. And if Saudi Arabia closes Ghwar and Khursaniyah there is no oversupply of oil. We have to take advantage of technologies that are cheap while they work, and work well, because we need cheap, non-interruptible power. We forget that solar and wind are interruptible and cannot be installed exponentially because the land occupied by megawatt is finite. And the cost of adding a network connection is not properly taken into account.
renewables IV
What has led to this problem? 
An optimistic central planning based on demand expectations -2% pa growth- which were completely unjustified, an increase of generation capacity and infrastructure -25 000 megawatts of additional capacity in gas and 35,000 megawatts of renewable- and the joy of subsidies to every technology without control –renewables, coal subsidies, capacity payments, island grants…
As subsidies mounted over each other, capacity rose and demand collapsed, we find a power system in which the annual costs -guaranteed by the state- exceed revenues by c4 billion euros … and regulation has always been modified to tax the efficient to subsidize not only “nascent” technologies, but also “dying” ones.
The solution
The solution to this issue will have to be a compromise between the industry, the entire sector-traditional and renewable-, the State and the consumer, and cancel future subsidies in all technologies. From the existing deficit, part will have to be absorbed by the energy sector, the state-responsible for the optimistic planning- and consumers, who wildly applauded the green economy and coal-mining subsidies without knowing its costs.
The German model is simple: subsidies are paid 100% by retail consumers, so people know the true costs of green energy – and 70% strongly agree- while industries, many highly energy intensive as BASF or BMW, do not pay the cost of those subsidies. Therefore, competitiveness does not sink and the country doesn’t suffer from industries closing down due to excessive power costs. Additionally, unnecessary capacity is removed, while inefficient companies go bankrupt, as they should.
The American model is interesting. Investors are given tax incentives, not direct subsidies, for renewable projects. Thus, if there is no investor interest or projects are not economically viable, the system will be reducing unnecessary capacity by the law of supply and demand and, of course, if a company has to file for bankruptcy, it does.
Spain needs to be absolutely clear in its power sector regulation, guarantee legal certainty and avoid changing rules retroactively to solve past mistakes. But the consumer cannot support all costs if everything is subsidized and if there are no market mechanisms that enable cheaper and more efficient technologies to displace the expensive inefficient ones. Our excellent renewable companies are competing exceptionally well in the previously mentioned international models. So let’s not ask at home what we don’t need abroad.
Seizing revenues from the efficient to give it to the inefficient does not help. More importantly, a couple of years later the need for revenues will make the inefficient of today suffer as well.
I commented a few months ago in my article “the problem of fixing the price of power in government offices and not in markets” that Governments and some companies do not like to liberalize. They live very well asking and giving favours while the bill is either not paid or sent to the consumer. Amazingly, while governments see power costs soar, they are surprised to see that the country’s industries close down and that demand falls.
Mistakes in planning –always from excess, of course- have led to a power sector overcapacity that has many similarities to the housing bubble. The generation fleet overcapacity in Spain is enough to cover demand for years. Let us use this opportunity to end the current tariff deficit through market mechanisms.

Markets expect a full Spanish bailout

Global Economy, On the cover, Sin categoría, Spain

(This article was published in El Confidencial on July 23rd 2012)”Defeat? I do not know the word”. Margaret Thatcher.Here come the shorts. It was obvious. Everyone prepared for a dose of QE from the Fed and the ECB, and when it didn’t happen, on Friday 75% of orders were better to sell.

Spain moves closer to a full bailout. Congratulations, we did it. Years of nonsense saying “we don’t have a problem of public debt” and “we have less debt to GDP than Japan” while our ability to repay was destroyed with wasted money on phantom airports, irrelevant statues, and high-speed trains with no passengers. The Ibex 35 plummets; no one invests in our bonds and the spread to the Bund rockets to 610 basis points. But do not think everything is discounted and that a bailout will be positive.

“There is no money”

The Spanish government in 2011 had fiscal revenues of 377 billion euro, about 7 billion more than in 2009. That means that in the middle of the crisis, with tens of thousands of businesses closing and unemployment rampant, revenues not only remained at a monstrous 37% of GDP, but increased. I estimate revenue of 385 billion in 2012. In other words, there is plenty of money. And there is liquidity, with hundreds of billions provided by the ECB. The only thing where there is no more money for is the public spending bubble, which has soared to 470 billion.

The recent demonstrations, which are perfectly legitimate, must take into account this problem. Today’s cuts come from past excesses.

It is amazing to see that citizens throughout the entire EU seem to presume “good intentions” to those rulers that bankrupted countries through reckless spending, but accuse of “bad faith” to those that deal with paying the bills and cleaning the accounts. The widespread perception that money is free, that spending is good and saving is bad.

Slash political spending now
Maybe it’s a matter of perspective. Arthur Laffer said that he would reduce the deficit in one hour. I am more conservative. Give me the Spanish budget and a red pencil, and I will reduce the deficit to zero within a week. I accept getting paid in government bonds.
What terrifies me is that everyone in Spain seems to have given up and just looks for excuses. It is irresponsible to dismiss as alarmists those who alert of the gravity of our problems. In fact, those who continue to say that “we are on track”, “we need more time” and thinking that this crisis is temporary are doing a huge disservice to the country. The VAT and tax increases will not be “absorbed by companies without affecting consumption” because corporate margins are at bear minimums, and we saw that consumption does fall as in 2010 with the previous VAT increases.

Has Spain given up?
The market does not “put pressure on Spain.” Investors do not buy because the risk of default is too high. Just look at the number of contracts traded on Spanish debt. Less than 40% compared to historical levels.

From a market perspective, there are three issues that concern me tremendously, issues that differentiate us from Italy, and unfortunately place us in the same risk as Greece or Portugal, but with a much larger corporate debt:

-Spanish governments always focus their economic measures on revenues (taxes). 61% of the measures adopted so far are expected increases in fiscal revenues.

–The cuts are not real cuts, but slowdown of the increase in spending. I read that the changes in the implementation of the Dependency Law “will allow a slowdown in cost increases estimated at about 3 billion euro”. I repeat, “a slowdown in expenditure growth”. Not cuts.

-Even with the new measures deficit is set to be around 6.5% in 2012, and the government continues to listen to advisers who say that everything will improve next year, as exports will help the economy and they need time to carry out reforms. It’s not true. The economy will not improve in 2013, nor will Spain export enough to cover the structural primary deficit- a key difference with Italy. And no, we have no time.

The perception that this is a temporary issue that can be sorted out increasing revenues is a huge mistake similar to that made by those who said in 2009 that “the worst of the crisis is over.”

¿Full bailout? No thanks. The example of Greece, Portugal and Ireland
We have seen this week a disastrous debt auction which, at the close of this article, has put the 10-year bond touching 7.2% and the spread to the Bund at 610 basis points. And I hear voices crying out for a full bailout and the ECB buying bonds as a great idea.

However, a full bailout does not involve anything positive. Do not expect an intervention to dismantle the bloated regional governments or to encroach on political spending. Moody’s had doubts on Thursday that Spain has any real chance of taking harsh measures on the regions. In fact, the Budgetary Stability Law itself establishes “hard” corrective measures that involve publishing a report and s written warning to the President of the region. Hardly agressive.

Intervention? Once the 10-year bond is up to 7% …
Unfortunately, the bailout process – including the “placebo” effect of useless massive purchases of bonds by the ECB- neither solves the crisis, nor calms markets, nor lowers bond yields unless the economy returns to competitiveness and political spending is slashed. Interestingly, political spending was not touched at all either in Portugal or Greece.

Greece and Ireland acted immediately and asked for a bail-out. Portugal took over five months to officially request one. In all three cases, the ten-year bond soared to 8 to 8.5% when the bailout was requested.

2012072194grafico1But once the bailout was in place, ten-year bonds just kept rising and the rating agencies downgraded the three countries to junk status. None of the countri


The few debt issues in Portugal and Greece were meagre 3-6 month paper, and Ireland was only able to return to the market almost two years after the bailout also with short-term paper, and that was after cleaning aggressively its banking system. The Portuguese 10-year bond is today at 10%, and the Irish is still at 6.3%.es had access to the credit market.

The time from applying for pre-bailout to downgrade to junk bond lasted between four and ten months for the three countries mentioned. Today, none of the bailed-out countries has seen a recovery of credit to the real economy.

Stocks are not discounting a bail-out
There are no “defensive” stocks with “exposure to emerging markets” and “low PE” when a country is bailed-out. Stock markets in Portugal and Greece fell by 44% and 65% respectively, a collapse almost as large as the pre-bailout fall. And we must bear in mind that, despite the poor performance of its stock market year-to-date, Spanish companies are still highly leveraged, a 200% of GDP in private debt, which comes in many cases from IOUs of the state for unpaid invoices.

The effect of a bailout for Spanish companies could be much higher than in Portugal or Ireland because of the huge refinancing needs in 2014, accounting for almost 35% of all corporate bond issues in Europe in said year. Without access to credit markets, companies would be forced to do more asset sales, dividend cuts and dismissals.

And watch out for the “positive example of Ireland.” The Irish Stock Exchange is the only one that has “recovered” because its index is mostly comprised of net exporters with low debt, no utilities and hardly any listed bank (less than 3% of the index), ie almost no companies subject to the intervention of the State. And despite this, the index collapsed.

Bail-out means massive cuts
Do we want the ECB to buy Spanish debt? More “pretend and extend”. Pack and disguise. We did not learn from the past and the subprime crisis.

2012072178grafico2What has been the benefit so far of the massive purchases of Portuguese, Spanish, Italian and Greek bonds than loading the ECB with losses of 56 billion?, Nothing else but making the ECB the most indebted central bank … and no positive effect either on bond yields or the economy of the countries. “Watering the wine” to make it appear that there is more quantity in the barrel.

Want a full bailout? Not if we look at the example of our comparable countries. If you think that what we have now in Spain is “austerity”, when there is at best a modest adjustment, a full-scale rescue implies all social costs are axed. Severe cuts in pensions and the number of civil servants, raising the retirement age, much higher tax hikes and a collapse in GDP of between 3% and 3.5%. Do not forget that Ireland, the “good example”, suffered a fall in GDP of 7% in a year.

Internal bailout
What Spain needs is an internal bailout. If the government is right and there is “no money” and there is a national emergency then they have to be consistent and cancel the aid to banks, imposing debt to equity swaps to its debtors, cancel all subsidies and grants provided by the government (close to 14 billion a year), close all duplicative councils and pay politicians 50% of their salary in government bonds. Curtail spending now. Immediately.

I do not want a bailout because we do not need it if we cut spending. I do not want the ECB infected with Spanish bonds in exchange for giving away sovereignty because we can show that investing in Spanish debt is a good idea if we adapt expenses to income and stop calling for default and “odious debt”.

Spain can solve its problem, which was and is excessive spending. And then we will see the huge positive qualities of the Spanish economy, with excellent companies that can continue to export and can create jobs if we lower taxes and attract capital, not if we throw investments away.

We must not surrender Spain to the lenders. The ECB and the troika do not rescue, they do not support, and they do not donate. They lend in exchange for much larger cuts. And it doesn’t work, it only impoverishes. It has been proven by previous bailouts and all interventions of the IMF since 1978.

The red pencil to slash unnecessary spending is needed now. I provide the pencil if needed.

Rescued banks and subsidized companies, a bad combination

Global Economy, On the cover, Spain,
(This article was published in El Confidencial on July 17th 2012)

The market had high expectations ahead of the announcement from Spain of new economic measures, but the comments in London are almost unanimous. The measures to reduce the deficit and the ones leaked for the electricity sector follow the same principle: take funds from the efficient to maintain the subsidized. It’s easy, as value-added tax revenues have disappointed due to alleged “cheating,” all citizens who do not cheat must compensate for the lost revenues.

Raising VAT is a measure that does not work as seen with previous VAT increases, which generated less revenue. However, it would have been acceptable if it had been accompanied by immediate cuts on the political spending that is choking the Spanish economy.

Instead, nothing substantial has been done about the large subsidies and grants, duplicate government agencies and the unsustainable weight of a bloated state created on the back of the housing bubble.

“Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.” Ronald Reagan

A government apparatus that is still above the peak levels of the bubble in 2007 has been cosmetically cut ever so slightly and those cuts are deferred throughout three years. As an example, of the 600 loss-making public enterprises that had to be closed, only two have been closed. No hurry. Meanwhile Spain became the fourth country in Europe with higher taxes .

I hear that the reason for these soft measures on spending is because the government “relies on exports” and expect that gross domestic product will not fall “as much as currently estimated”, and as such it will not be necessary to reduce the weight of the state, which is currently “only” 50 percent of the economy.In my opinion, Spain runs the risk of following in the footsteps of Portugal. “We’ve done our homework,” said Vitor Gaspar, Portugal’s finance minister. Yes, all but cutting the weight of political spending. In Portugal, the weight of the state in the economy rocketed and bond yields rose again after the cuts to historic highs.

2012071699grafik 1

The impact on the economy of constantly rescuing and subsidizing entities is brutal because it discourages the efficient, weakens the non-problematic companies and kills the perception of economic freedom, but above all, because it makes “socializing losses” a habit when it should be a truly exceptional measure and limited to extreme cases.

This is important because when we see that the €100bn “loan” to bail out banks includes the following demands:

– A clause that requires banks to have a capitalization (core capital) of 9 percent. This means a larger “credit crunch” than currently seen unless we liberate financial resources currently absorbed by the government, forcing banks to buy sovereign and subsidizing zombie companies.

– Requirement to divest industrial holdings. If tax increases, lack of security and regulatory uncertainty weaken companies, stocks collapse and capital losses of these holdings will be extreme.

– Requires the creation of “agencies to sell troubled assets” – bad banks – in which the taxpayer runs the risk that the price paid by the state for these assets is “far from a bargain.”

When public resources are allocated to bailouts and subsidies constantly and in numerous sectors the crowding-out effect not only hurts the real economy but it also forces taxpayers and investors out. Who will create wealth and tax revenues if we end up with a country of rescued banks and subsidized firms?

The electricity sector regulation that has been leaked seems equally wrong-footed, aiming to seize revenues from any company that generates positive cash flow. After a decade of planning as if demand were to grow by 2 percent per annum, giving subsidies everywhere. Now that the tariff deficit and the cost of the system have ballooned, the solution is to tax everyone with the risk of bankrupting the whole energy sector, which would be loss-making in generation and distribution in Spain.For reference, I wrote an article a few months ago about the numerous mistakes made by Spain in its energy policy called “The problem of fixing the price of electricity in government offices and not in the market.”

2012071650grafik 2

In a nutshell, we have a problem when most technologies are subsidized and over-capacity is not sorted through market dynamics. Subsidized coal, capacity payments, “restriction” markets, unsustainable premiums to renewables, etc. Overcapacity in the entire system… But who cares when the taxpayer pays for generous subsidies and planning mistakes?

We risk losing investors in Spanish debt and the Ibex 35
If we rescue the inefficient and those who eternally generate losses, we will continue pushing out investments and capital, hurting small and medium enterprises, which generate 70 percent of value added in our country, making it impossible for businesses to grow due to restrictive legislation, high energy costs and an onerous tax burden.The policy of “pretend and extend” of the government aims to help different lobbies, but the problem is that cronyism just makes zombie companies, not strong ones. As the government slowly runs out of other people’s money, even lobbies end up suffering the tax collection greed. Everybody loses.

2012071635grafik 3

The state cannot limit and supplant the private sector. Just looking at the average returns made by government investments in the past eight years is painful. Negative, on average, compared with the cost of capital.

The bank bailouts and unproductive subsidies are two very similar problems arising from the habit of governments of intervening in business decisions and then “try to solve” their mistakes through confiscatory measures. And it’s very easy to do when there is too much money available, but when the government runs out of other people’s money, funding inefficiency and subsidies means more debt.

And then we have a problem with 320 percent of GDP in private and public debt, 20 percent of the total private debt of Spain in the balance sheet of 15 companies of the Ibex, and refinancing needs in 2014 that account for 35 percent of the total “supply” of bonds in Europe.

We must stop intervening wildly. The solution for Spain cannot be trying and failing to recover the tax revenues from the real estate bubble, as I mentioned in this Wall Street Journal article.

I read that the Spanish government is very worried about the possibility that the companies in the Ibex 35 could be taken over. However, through a myriad of taxes, regulatory changes and legal uncertainty, Spain seems to be making its companies unattractive and weaker, massively indebted, uneconomic and subject to the whims of the state both from the investment side (“you have to build at any cost”) and from the side of profits, which are seized from time to time.

It is sad to say, but more and more funds are not allowed to invest in Spain. I hear it constantly. “Spain is uninvestable.” If I were a member of the government, I would worry less about trying to “protect” through intervention and I would worry more about attracting capital.

Recipe for a Spanish Comeback

Global Economy, On the cover, Sin categoría, Spain

(This article was published in The Wall Street Journal on June 26th, 2012 copyright WSJ)

The recent pullback in Spanish bond yields has been heralded locally as almost a victory. But if so, it’s probably a pyrrhic victory, as Spain’s 10-year sovereign bond yield still stands at 6.5%, and five-year credit default swaps remain at historic highs of 563 basis points. Meanwhile, the question in investors’ minds is the same: How will Spain repay its public debts, which have more than doubled since early 2008 to 72% of GDP as of the first quarter of 2012?
Before Spaniards elected the Rajoy government last year, the previous government had denied the crisis for years and failed to act swiftly upon it, leading foreign investors to avoid the country’s bonds. Spanish public debt owned by non-residents has fallen to 37.3% today from 54.5% in 2010. The real figure is even lower, as a significant portion of that 37.3% represents debt bought by the European Central Bank.
The slump in international demand has been mostly offset by bond buying by domestic institutions, including the Spanish social-security and public-pension funds, and mostly from Spanish banks. These Spanish banks now loading up on sovereign bonds are the same ones that have used €288 billion of the ECB’s discount-lending facility so far this year. This is a truly dangerous move, as the vicious circle of risk-contagion between bank balance sheets and sovereign risk affects every asset class. This has also created a credit crunch for the real economy, particularly unhelpful in a country in which small and medium-sized businesses generate 70% of value added and almost 80% of employment.

According to Spanish Finance Minister Luis de Guindos, investors are not taking Spain’s “growth potential” into account. There is truth in that assessment, but Spanish authorities seem resigned to the notion that they can do no more to actualize this “potential.” I believe there is a lot more they could do.Given its potential, Spain can do better, it can do more and it can do it now.

Spain has failed to restore investor confidence in its ability to repay its debts predominantly because the reforms pushed by the Rajoy government so far have focused mostly on revenues, namely tax increases, while the government’s bloated administration and massive subsidy culture remain in place. As such, the economy deteriorates and taxes go up, while debt continues to grow.
Spain seems stubbornly intent on restoring tax revenues that were the product of a giant real-estate bubble, and those will not return easily. Tax collections per capita increased almost 40% between 2003 and 2008 due to the housing bubble, driving a similar increase in government spending. Spain created a public sector perfectly suited for an economy that would grow 2% per year forever. It didn’t. Once the bubble burst, those revenues disappeared but the spending stayed. That funding gap, which took Spain to an 8.9% deficit in 2011 from a 2% surplus in 2007, can not be tackled through taxes, but only through cuts in spending.
When discussing possible cuts to Spanish public spending, one always hears that every reduction is only a drop in the ocean. True, but a million “drops” would add up quickly in a country with 17 regional administrations, thousands of loss-making public enterprises, tens of billions in subsidies, and a complex web of regional and national regulatory bodies.
The Spanish economy, centered on services, industry, tourism and construction, is strongly cyclical. As such, the burden of the state and the maximum debt it can sustain need to be smaller than its less cyclical peers. Spain could restore confidence and reduce its bond yields by achieving this through a four-step, zero-cost program focused on:
1. Structural public-administration reforms: Eliminating duplicative public administrations, chiefly in regional, island and county councils, could save up to €20 billion, according to Spain’s Circle of Entrepreneurs think-tank and the Conservative Party. Additionally, selling off Spain’s dozens of public television and radio networks, and ridding taxpayers of thousands of loss-making companies owned by regional governments, could save €10 billion.
2. Tax Reform: Increasing Spain’s standard value-added tax rate to 20% from 18%, while reducing the employer portion of social-security taxes by 3.5 percentage points, could boost GDP by between 1-1.3% without any decrease in government revenue, according to a recent study by domestic banks. Spain scores 69.1 out of 100 in the Heritage Foundation’s Index of Economic Freedom, significantly below its peers. It needs a long-term sustainable plan of tax incentives for new businesses, and a unified system of regulation instead of the current patchwork of rules, to allow small and medium-sized businesses to grow into large corporations.
3. Cut subsidies by half: Spain spends more than 2% of its GDP per year on corporate subsidies and grants (not including its aid to banks). So far these have only been lightly trimmed throughout the crisis. The subsidy culture keeps zombie businesses in place and puts up a barrier to the development of more productive enterprises. End it.
4. Attract capital: Spain’s private-equity funding of companies is below 0.1% of GDP, according to the national stock-exchange regulator. This is partly due to regulatory instability, along with its protectionist regulation of foreign capital, as any fund that has tried to open an office there knows. By opening its doors to foreign investment, Spain could erase the view that all major deals there must happen between friends and behind closed doors, thus improving its public image in financial markets.

Sovereign-bond investors are by definition the most risk-averse of the world’s financiers. Markets want clarity, sustainability and no surprises. Spain needs to prove to them that it can not only meet its current economic estimates, but beat them. The country has done it many times in the past, and it still possesses all that “potential” that Mr. de Guindos talked about. Spain can do better, it can do more and it can do it now.copyright The Wall Street Journal. Published with permission.