Spain: still bullish - Scott Appleton

Like many of the world’s economies, Spain is facing difficult times, yet some feel it is better equipped now than ever before to face the challenges that lie ahead.

When the 2009 IBA Annual Conference opens in Madrid in October, delegates will experience the characteristic warmth and charm of Spain, in a city that offers cultural and social stimulation day and night. But scratch the surface and delegates will also find a country facing profound challenges.

‘It is a difficult time for Spain and Spanish businesses as it is for many around the world’, says Fernando Pombo, Co-Chair of the IBA Host Committee for the IBA 2009 Annual Cofnerence and immediate past IBA President, and President of Gómez-Acebo & Pombo. ‘But Madrid’s physical location, its importance as a conduit into and out of Latin America and the vibrancy of its energy, infrastructure and banking industries mean that the conference is both timely and ideally located to enable practitioners to discuss the key issues at the highest levels.’

Contagion

There is no doubt that Spain is a modern European success story. Following the end of the Franco dictatorship in 1975, it passed peacefully into democracy and subsequently gained membership of the European Community (now European Union) in 1986. In only a few decades it has experienced unparalleled growth and social change to become one of the world’s ten largest global economies and the fourth largest in the eurozone.

Last September, the Prime Minister José Luis Rodríguez Zapatero confidently stated that Spain had overtaken the average income per head of Italy and that overtaking France was on the horizon.

Only weeks later, however, the global banking system came to a virtual collapse, adding international financial concerns to Spain’s own significant domestic difficulties. Spain’s economic miracle has subsequently come to an abrupt end. For all its evident success it has proved no more immune to the global economic crisis than anywhere else in Europe and in some respects it has fared even worse. After 15 years of growth, last year saw the bursting of Spain’s housing bubble and the near collapse of its building industry. A major economic driver, accounting for 7.5 per cent of gross domestic product (GDP), the result has been the bankruptcy of many of its major development and construction companies, including Spain’s first-ever public company insolvency. The fallout has been unprecedented pressure on supply industries and the underwriting regional savings banks (cajas), and huge job losses.

‘There is an unbalance in the Spanish economy, which is now well documented. Spain has been tremendously affected by the real estate crisis, which has contaminated almost all of the domestic economy’, says Miguel Klingenberg, managing partner of Freshfields Bruckhaus Deringer in Madrid, and a member of the IBA Host Committee.

Consumer spending and retail sales are also down, while unemployment levels have reached almost 17 per cent – more than twice the EU average – with predictions that they may rise to 20 per cent over the next year. It has a budget deficit of 9.6 per cent of GDP, which itself has fallen three per cent on last year and may even lead to deflation.

The collapse of international consumer demand has also had a heavy impact on Spain’s automotive sector, which accounts for almost one-fifth of total exports. The past year has seen many leading public and privately held companies undertake long and complex restructurings and refinancings, while even some of the country’s leading football players – who led Spain to victory in the 2008 European Championships – have fallen victim to the economic malaise and gone without pay as their clubs wrestle with onerous debts.

‘The Spanish macroeconomic outlook is not encouraging. As for signs of recovery, I do not believe that any more can be said than was raised by the government in the debate on the state of the nation in early May when it put forward a package of 90 measures to stimulate the economy. Hopefully some of them will have the desired impact, although there is much scepticism’, says Miguel Gordillo, co-managing partner of Garrigues, Iberia’s largest law firm, and a Host Committee member.

‘The country may be in recession but it is no longer in crisis’

Prudent

Lawyers acknowledge that Spain’s bonanza years have come to an end but emphasise also that behind the headlines there is some good news. Spain is much richer and better prepared to confront the challenges if faces today than in previous generations.

‘On a social level, we are not experiencing as much discomfort as we might otherwise do because of the family and social cushions that exist. Here too I think we have a better ability to cope with a crisis of this magnitude than some other developed countries’, adds Gordillo.

Spain has also learnt the lessons of previous economic downturns. Many companies used the boom years to finance their first steps towards international expansion and so a number of business sectors continue to perform relatively well – Spanish energy and infrastructure companies as well as its main banks are emerging as world leaders. ‘One of the points in Spain’s favour has been that many leading businesses have come relatively late to globalisation and consequently were much less exposed to the strategic or financial risks than their international competitors’, says Joan Roca Sagarra, the Barcelona-based managing partner of national firm Roca Junyent, and also a Host Committee member.

He points to the success of BBVA and Banco Santander, which have capitalised on their strong cash positions, to make opportunistic international acquisitions while banks elsewhere have faced collapse or nationalisation.

A key reason for this success, notes Fernando Pombo, has been the Bank of Spain’s role in ensuring that Spanish financial institutions continued to make bad debt provision even in the good years. It also restricted their ability to deal in the more creative products and off-balance-sheet structures that proved so destructive elsewhere.

‘Our leading public banks continue to do well in part because of their strong management but also because of regulatory policies borne out of previously difficult times – Spain suffered its own banking collapse in the late 1980s and the regulatory demands placed on operators that once seemed onerous have clearly proved prudent.’

Spanish energy companies such as Iberdrola, Endesa and Gas Natural/Unión Fenosa have also expanded and many now have their focus towards the United States, as do renewables companies such as Isofoton, Europe’s largest manufacture of photovoltaic cells, and Abengoa, which is building a US$1 billion thermo solar plant in Arizona. Spain has the fastest-growing solar energy market in the world and has already met its 2010 EU renewable energy targets.

‘Even some of the country's leading football players... have gone without pay’

Barack Obama visited the Pennsylvania manufacturing plant of Bilbao-based wind turbine manufacturer Gamesa on the presidential campaign trail. The firm is now among the many Spanish companies looking to capitalise on the energy diversification incentives of the $787 billion US stimulus plan – alongside infrastructure companies such as Ferrovial, ACS, Cintra, OHL and Globalvía.

‘These companies are now among the world’s largest players and looking to take advantage globally of their market positions and competitiveness. Companies are still doing business and making profits albeit many are now being much more conservative in their international ambitions’, says Klingenberg.

Old ties

Despite the emerging opportunities in the United States it is, however, Latin America that remains a favoured focus for Spanish businesses, say lawyers. Spain is now the largest foreign investor across the region after the United States and many of its leading companies are also major regional players.

‘There are obvious historical, cultural and linguistic ties between much of Latin America and Spain and we are expecting as many delegates from the region in Madrid as attended last year’s conference in Buenos Aires’, says Fernando Pombo. ‘Many of our legal systems and institutions are almost identical and so there are many lessons to be learnt from each other.’

Telefónica is the largest international investor in the region, while Banco Santander and BBVA operate networks that generated almost half of their total 2008 profits. In 2007, Grupo Santander acquired Brazil’s Banco Real, while BBVA’s regional confidence is demonstrable in its plans to build a showcase headquarters in Mexico City, Mexico being its second largest market outside Spain.

Likewise, Endesa, Iberdrola and Gas Natural/ Unión Fenosa have significant Latin American operations, while Spain’s largest petrol company Repsol YPF last year revealed three of the world’s largest oil and gas discoveries, in Brazil, Peru and Bolivia.

‘I think Spain has a key position because of a shared language and cultural and social ties, which give us an advantage over Anglo- Saxon and Asian competitors’, says Miguel Gordillo. ‘But we must use these advantages for the benefit of all and I believe that Spain, through its major companies in the region, is an example of socially responsible investment.’

But the flow of investment is also now moving the other way and Madrid is emerging as a favoured destination for many Latin American companies, with Mexican giants Cemex and Pemex both utilising the city as their European headquarters.

‘Spain is a natural first destination for the region’s businesses as well as those looking to expand throughout Europe. All of this helps reinforce the relevance of this year’s conference to the region’s lawyers, to be able to talk about initiatives and to do deals together’, says Fernando Pombo.

Resolve

Despite Spain’s current difficulties and the evident external and internal challenges it faces – including issues such as labour reform, industrial productivity and the competitiveness of its powerful regional cajas – lawyers are not overly pessimistic.

There is the resolve to rebuild Spain’s fortunes, to capitalise on its cultural and geographical ties and the increasing demand for its cutting-edge expertise but also to build new industries.

‘Much is being done in cities such as Barcelona, for example, to focus on research and development and to attract leading international companies in the life sciences, electronics and technology sectors. This may not deliver immediate results but we believe it is the right strategy if we are to better position ourselves for the decades ahead’, says Joan Roca.

The headline economic figures may be important but simple statistical comparisons only tell a limited story, note some. Even in the good times unemployment levels in Spain hovered around eight per cent, double that found in France, Italy or Germany. The country may be in recession but it is no longer in crisis.

‘There is a realisation that, yes, we need to take important and perhaps difficult decisions in order to move forward but we are in a much better shape economically to face these issues than in previous decades’, adds Joan Roca.

Miguel Klingenberg agrees: Spain has suffered but it can learn new lessons. ‘We may be struggling but our ambitions have not diminished. Despite the evident difficulties the world is not however coming to an end. There is still a lot of life in our country.’

For Fernando Pombo, the significant issues are the role Spain now plays on the world stage, the interconnection of its economy with Latin America and its growing links with Asia, Africa and the United States.

‘Only 20 years ago Spain had hardly any international profile and was facing similar economic difficulties – today our businesses are world leaders in many areas of great importance. We know the value and importance of perseverance, dedication and hard work. All of which will help us confront and overcome the current challenges.’

Significant for the international legal community will be the lessons Spain has learnt, the measures it is taking to move on and what can be shared with others facing similar experiences elsewhere around the world, he concludes.

‘The IBA Annual Conference is now a world event. The quality of the debate, the level of input at seminars and the importance of the social events mean that for elite practitioners with an international perspective nonattendance is not an option. Madrid will be no exception.’

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Scott Appleton is an Editor at Iberian Lawyer based in Madrid. He can be contacted by e-mail at scott.appleton@iberianlegalgroup.com.