Spain’s Central Bank Has Debt Worries Over Government's €200bn Stimulus

Spanish Prime Minister Pedro Sánchez has ploughed billions of euros into the country's economy in order to safeguard public health and protect workers during the coronavirus pandemic - the country's central bank supports the stimulus, but warns that steps should be taken to address the associated debt.

Posted jeudi, juin 18 2020
Spain’s Central Bank Has Debt Worries Over Government's €200bn Stimulus

Pedro Sánchez

In an effort to help Spain recover from the devastation wrought by the coronavirus pandemic, the country’s government – led by Prime Minister Pedro Sánchez –  has announced more than €200 billion worth of measures aimed at providing a much-needed stimulus to the economy.

The latest measures, announced this week, include a €4.2 billion coronavirus auto industry stimulus package, which aims to breath life into the country’s car manufacturing sector, which is the second biggest in Europe. In addition, the Spanish government has unveiled a €4.25 billion plan aimed at reviving the tourist industry.

It follows the government’s announcement in March of a €200 billion stimulus package to counteract the health and economic effects of the coronavirus pandemic. The €200 billion boost was in addition to a €14 billion stimulus plan that had been announced prior to that. The combined total represents almost 20 per cent of Spain’s GDP.

However, the size of the stimulus has led to Banco de España governor Pablo Hernandez de Cos warning that the government’s emergency spending on the coronavirus crisis must be “accompanied with a long-term plan to address the debts it will incur.”

The early signs are that the Spanish economy has fared worse than most - figures released by Banco de España show that there was a 34 per cent fall in output between March 16th and 31st, which  compares unfavorably with the eurozone average of 21 per cent.

Debt turmoil memories 'still fresh'

In a statement, Banco de España said that, with “Spanish memories still fresh of Europe’s debt turmoil of the past decade”, Hernandez de Cos had urged lawmakers in parliament to work together on plans for “fiscal consolidation as well as structural reforms”. It added: “Spending to confront the coronavirus crisis in one of the region’s worst-hit countries may push borrowings to a hefty 122 per cent of gross domestic product this year.”

However, Hernandez de Cos has stressed that it was vital that fiscal stimulus measures for the Spanish economy are not ended prematurely. “Nothing would be worse than removing the fiscal stimulus measures too soon,” he said. “If you don’t use fiscal policy, the contraction in GDP will be much greater and there will be a greater increase in debt down the road.”

Hernandez de Cos has also said that a proposed €750 billion European Union recovery fund is “welcome but insufficient because it’s only a temporary response”. He added: “A permanent stabilization mechanism would have two components -- one pool of funds kicking in automatically when the economy weakens and another that would be discretionary to use depending on a specific crisis.”

So what have been the key elements of Spain’s fiscal stimulus? One part consisted of €36 billion (amounting to around 3 per cent of GDP) worth of measures aimed at bolstering health services, providing more unemployment benefits, developing of drugs and vaccines, providing sick pay for workers infected by coronavirus, as well as the provision of a universal basic income. Specifically, with regard to public health, the stimulus package – according to International Monetary Fund (IMF) figures – promised:

  • €2.8 billion for regional health services
  • €1.4 billion of support for the Ministry of Health
  • €46 million for the development of Covid-19 drugs and vaccines

But the bulk of the funding sought to address issues rising from people losing their jobs. The Spanish government pledged:

  • €17.8 billion in unemployment benefit for workers laid off under the Temporary Employment Adjustment Schemes (ERTE) due to Covid-19
  • €1.4 billion in increased sick pay for Covid-19 infected workers or those quarantined
  • €3.8 billion in allowances for self-employed workers affected by the suspension of economic activity
  • €3 billion for the introduction of a new means-tested “minimum vital income”
  • €2.2 billion for exemptions of social contributions by impacted companies that maintain employment under the ERTE
  • €14 billion in tax payment deferrals for small and medium enterprises and the self-employed for six months, with the first four months exempt from interest
  • €1.1 billion to enable flexibility for SMEs and self-employed for calculating their income tax and VAT installment payment based on the actual profit in 2020
  • €1 billion for a zero VAT rate on purchases of medical material essential to combat the Covid-19 until July 31, 2020.


Meanwhile, the Spanish government has extended up to €100 billion government guarantees for firms and self-employed, covering both loans and commercial paper of medium-sized companies that participate in Spain’s Alternative Fixed Income Market (MARF). There are also up to €2 billion of public guarantees for exporters through the Spanish Export Insurance Credit Company, as well as guarantees for loan maturity extensions to farmers using the special 2017 drought credit lines.

In addition, there is also €1.2 billion of guarantees to provide financial assistance in relation to housing expenses for vulnerable households (€1.2 billion), as well as €1 billion of additional loan guarantees for SMEs and self-employed through the Compañía Española de Reafianzamiento. These public guarantees could leverage up to €83 billion of liquidity support to companies through the private sector, according to the IMF.

Other measures introduced by the government include €10 billion of additional funding for the Instituto de Crédito Oficial (ICO) credit lines, as well as the introduction of a €400 million special credit line for the tourism sector through the ICO. In addition, there has been a three-month moratorium on mortgage payments for the most vulnerable as well as homeowners who have rented out their mortgaged properties.

However, questions remain about the effectiveness of the stimulus and time will tell what the final verdict will be. The early signs are that the Spanish economy has fared worse than most - figures released by Banco de España show that there was a 34 per cent fall in output between March 16th and 31st, which  compares unfavorably with the eurozone average of 21 per cent. The Spanish government will be hoping that the effects of the stimulus, while taking time to trickle through, will be successful in helping to get the economy back on its feet in the not too distant future.