The Spanish Revival

MUNICH – After fighting for its life for the last two years, Spain’s economy finally seems to have moved out of intensive care. The banking sector has been deemed “cured”; demand for Spanish bonds has soared; and the country can once again raise capital at reasonable interest rates on the market. But much more work must be done to ensure a stable long-term recovery.

First, the good news. Investor confidence is on the mend, exemplified by the recent placement of €10 billion ($13.8 billion) in ten-year government bonds – which was over-subscribed by four times. While risk premiums on ten-year bonds remain far above pre-crisis levels, yields have dropped considerably, from 4% at the beginning of 2010 to 3.2% today. And a growing number of banks and companies are returning to the capital market.

Moreover, the Spanish economy returned to growth in the third quarter of last year, and is on track to grow by roughly 1% this year. If, as expected, GDP grows by about 2% next year, Spain will outperform the eurozone average and create an environment conducive to significant long-term employment gains.

Perhaps the most notable consequence of Spain’s recent reform efforts is its current-account surplus – the country’s first in more than two decades. At the peak of the crisis, Spain’s current-account deficit amounted to an unprecedented 10% of GDP.