SPAINFINANCIAL TIMES SPECIAL REPORT | Tuesday June 12 2012

www.ft.com/spain-2012 | twitter.com/ftreports

Inside this issueBanksWhat beganas a smallissue hasnow growninto asignificantdanger for

the country Page 2

Start-upsMany new businesses arethriving and are in the bestof health despite recessionPage 2

RegionsDevolution is at the heart ofthe country’s problemsPage 2

EconomySome sectors, such astourism and exports, remainremarkably resilient Page 3

FootballThe gamethat oncedivided thenation nowunites itPage 3

Energy investmentSome are counting the costof going abroad Page 4

LanguagesVoice actors are accused ofharming education as fewerSpaniards watch and hearforeign language televisionin the original languagesPage 4

WineThe high quality ofeven cheap bottles is oneof the country’s best keptsecrets Page 4

Guest ColumnThe country’s fall from

grace isexaggerated,saysWilliamChislett(left)Page 4

L ike an actor with stagefright in an intermina-ble drama, Spain inmid-2012 finds itself

exactly where it does not wantto be: centre stage in the unfold-ing tragedy of the eurozone.

Each year since the collapseof Lehman Brothers in 2008,Spaniards have braced foranother year of crisis, onlyto be reassured by politiciansthat the sacrifices of austeritywould be rewarded sooner orlater with an economic recov-ery. Each year, the light at theend of the tunnel – as in thesardonic joke – has turned outto be the threat of an oncomingtrain.

First Greece, then Ireland,then Portugal collapsed into thearms of the European Unionand the International MonetaryFund. These smaller eurozoneeconomies were forced to seekmultibillion-euro bailout pro-grammes because they could nolonger finance their debts in thesovereign bond markets.

Both José Luis Rodríguez Zap-atero, the Socialist prime minis-ter from 2004 to 2011, and Mari-ano Rajoy, the centre-right Pop-ular Party leader who soundlydefeated him in a general elec-tion last November, thoughtthey could steer Spain out of thedanger zone.

Mr Zapatero, after a brief flir-tation with Keynesian publicspending that pushed thebudget deficit up to 11.1 per centof gross domestic product in2009, obeyed his European part-ners in Berlin and Brussels andimplemented what was billed asone of the harshest austerityprogrammes in the developedworld, cutting civil servants’pay and raising taxes.

There was more of the samefrom Mr Rajoy. He immediatelyreinforced fiscal discipline

(which had been tighter intheory than in practice underthe Socialists), liberalised theuncompetitive domestic labourmarket and accelerated reformsof the troubled financial sector.

Yet none of this has beenenough to keep Spain safe.

As this report went to press inearly June, Spain’s ability toraise money by issuing sover-eign bonds was threatened byan alarmingly high risk pre-mium – the gap between theyield on its 10-year bonds andthose of low-risk Germany – ofmore than five percentagepoints.

Most analysts and economistswere predicting that Spain – as

the fourth largest eurozoneeconomy, it is much bigger thanGreece, Ireland and Portugalcombined – would need someform of international bailoutprogramme, although the Span-ish government was hoping tolimit the rescue to perhaps€50bn of aid to recapitalise itsbanking system.

A full bailout would costabout 10 times as much, placesevere strain on the finances ofinternational institutions,undermine confidence in globalmarkets and increase the possi-bility that Italy and otherswould also need help, and soraise the prospect of a break-upof the euro. The unassuming Mr

Rajoy, his popularity severelydented by the crisis in the sixmonths since he took office, hasbelatedly tried to reassure Span-iards that a catastrophe is notinevitable.

“We are not on the edge of aprecipice,” he told businessleaders at the start of June.

“It’s not a bed of roses butthis is not the eve of the Apoca-lypse either.”

In terms of bare statistics atleast, it is true that Spainentered the crisis four years agoin relatively good shape, andstill has lower public sector debtas a proportion of GDP thaneconomies such as the UK andthe US, let alone Italy and

Greece. Only a few years ago,there was virtually no sovereignrisk premium at all, and some-times it was inverted – in otherwords, the markets perceivedSpanish debt to be less riskythan Germany’s.

Spanish banks, furthermore,had hardly any involvement inthe “toxic” derivatives that sanksome of their Anglo-Saxonrivals, and were shielded fromthe effects of the post-Lehmanrecession by an enviable systemof counter-cyclical provisions –money set aside from profits inthe good years to protect thebanks against loan losses whentimes became hard.

Even now, in the depths of

international despair about theeurozone, Spain can boast ofsome economic and politicalachievements.

Exports and the tourismindustry have been performingwell, and a current account defi-cit that topped 10 per cent ofGDP at the start of the crisis isheading towards equilibrium asthe economy rapidly adjusts.

Spanish democracy is intact,the government has a clearmandate from voters and –unlike in Italy – is not led by anunelected technocrat with theblessing of Brussels. In theBasque country, the militant

Nation wearies of the euro crisisAn economy in goodshape, with greatstrengths, has fallen inthe world’s estimation,says Victor Mallet

Continued on Page 2

Pondering: Mariano Rajoy of the Popular Party says “We are not on the edge of a precipice. It’s not a bed of roses but this is not the eve of the Apocalypse either” Getty

2 ★ FINANCIAL TIMES TUESDAY JUNE 12 2012

Spain

separatist group Eta last yearannounced the “definitive cessa-tion” of its military activitiesafter more than 800 killings inhalf a century.

Yet Spain, which becameaccustomed to receiving praisefor its rapid modernisation, cul-tural vibrancy and economicgrowth after the restoration ofdemocracy in 1978, has becomethe butt of jokes around theworld. Probably the lowest blowwas that jibe from RichardBoucher, a US official at theOrganisation for EconomicCooperation and Development,who said Spain today was “onlygood for flamenco and redwine”.

How did Spain fall so far, sofast in the estimation of theworld? Mr Rajoy’s advisers andindependent economists agreethat much of the blame lies inthe flawed structure of the euro.

Low interest rates suitable forthe mature German economywrought havoc in the credit-hungry and overheated nationsof the European periphery.

French and German investors,via their banks, lent tens of bil-lions of euros to Spanish banksat low rates to finance a home-building spree that had come toa crunching halt by 2008.

Spain’s problem now is notonly its public debt, but its pri-vate, external debt.

“We went way over the top –trade unions, businessmen,banks, politicians, the wholecountry,” Juan Roig, chairmanof supermarket chain Merca-dona, told Spanish radio thismonth.

Spain, he argued, had beenliving beyond its means givenits productivity. “I think if wedon’t change, if all we Spaniardsdon’t change our ways, therewill be a bailout.”

As the eurozone crisis deep-ened, banks, particularly theregional savings banks knownas cajas, found themselves in atraditional bad loan crisisrelated to property, and in mostcases have yet to extricatethemselves from the resultingcollapse of their profits.

Bankia, a merger of sevencajas optimistically floated lastyear, was nationalised by thegovernment last month andsays it needs an extra €19bn ofcapital on top of the official aidit has already received.

It did not help that Mr Zapa-tero and Mr Rajoy, both pro-Eu-ropeans, were neither of themmuch good at the vital diplo-matic business of negotiatingwith Spain’s European partnersover how to handle the crisis.

Mr Rajoy and his ministers,says José Ignacio Torreblanca,senior fellow of the EuropeanCouncil on Foreign Relations,thought it was enough to dowhat Germany wanted and were“perplexed” when the expectedsupport was not forthcoming.

“He came to power with theunderstanding that he didn’tneed to do European policy, thathe could just do the structuralreforms at home,” says Mr Tor-reblanca. “It was a mistake.”

Spain faces a difficult chal-lenge. More than 5.6m Spaniardsare unemployed, the economy isshrinking, and economistsdoubt Spain can cut its budgetdeficit as agreed with the EU to5.3 per cent of GDP this yearfrom last year’s 8.9 per cent.

After years of expansion, thepopulation has started to fall asLatin American immigrantsreturn home and Spaniards goabroad in search of work.

As Mr Rajoy asserts, 2012 willnot be the year of the Apoca-lypse.

But it is unlikely to bringmuch relief to a country wearyof economic and financial crisis.

Nationwearies ofthe eurocrisisContinued from Page 1

ContributorsVictor MallettMadrid Bureau Chief

Miles JohnsonMadrid Correspondent

Ursula MiltonCommissioning Editor

Steven BirdDesigner

Andy MearsPicture Editor

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When the history of Spain’s travailsafter the 2008 collapse of LehmanBrothers is written, it will be said thattwo problems in particular helped totrigger its own crisis: the financial dif-ficulties of the autonomous regions,and the collapse of troubled banks.

Yet both problems have their originsin the radical devolution of politicaland economic power after the death ofthe dictator Francisco Franco in 1975.Most of the banks that had to be bailedout or nationalised were former cajas,the regional savings banks that lenttoo much to local property developersand had close ties to politicians in theterritories where they operated.

Criticism of devolution is not new inSpain. Even before the crisis, businessleaders and some national politicianshad grumbled about the bureaucraticand financial cost of maintaining 17autonomous regions and over 8,000municipalities, as well as a layer of 50provincial authorities in between.

The post-Franco democratic constitu-tion of 1978 granted autonomy and

regional identities to the historicallydistinct territories of the Basque coun-try and Catalonia, and to other, quin-tessentially Spanish regions – a processcalled “café para todos”, coffee for all.

That led to a plethora of regionalregulations that frustrated local andinternational investors such as GeneralElectric, and prompted Mariano Rajoy– the centre-right Popular party leader,who is now prime minister – to cam-paign for a “single market” in Spainwhen he was in opposition. “The auton-omous regions all have different normsand that is bad for commercial activ-ity,” he said in 2009.

Spain’s regions and municipalitiesspent on a grand scale before the crisis,financed in part by surging propertytaxes from the housing boom. Someopened “embassies” overseas to pro-mote trade and investment, and publi-cise their regional identities. New uni-versities, airports and sports centresproliferated.

But it was not until after the housingbubble began to deflate in 2007, andEurope entered its post-Lehman crisisthe following year, that it became clearhow unsustainable all this spendingwas. Property tax revenues collapsed.Savings banks, starting with Caja Cas-tilla la Mancha (CCM) in 2009, totteredand were taken over by the authorities.

As the crisis deepened, Spanishregions increased their own borrowings

on top of their share of the Spanishnational debt. By the end of last yearthe 17 regions had €140bn of debt, dou-ble the amount three years earlier.They and the municipalities had alsocrippled small businesses by failing topay their suppliers, forcing the Rajoygovernment to launch a €35bn schemethis year to pay their overdue bills.

When the PP beat the incumbentSocialists in a regional election in Cas-tilla La Mancha a year ago, theyquickly declared the region “totallybankrupt”, calling it “the Greece ofSpanish regions” and pointed out thateven its official 2010 budget deficit – 6.5

per cent of GDP – was more than dou-ble the official target.

Regional deficits helped to under-mine international investor confidencein the Spanish national governments ofJosé Luis Rodríguez Zapatero, theSocialist prime minister, and of MrRajoy when he won the general elec-tion in November last year.

When Spain greatly exceeded theoverall 6 per cent deficit limit it hadagreed with the European Union for2011 – the latest update puts the finaloutcome at 8.9 per cent of GDP – theblame was laid largely at the door ofthe regions and the inability of both PPand Socialist regional administrationsto control their public finances.

The rushed nationalisation in Maythis year of Bankia, a collection ofseven cajas from Madrid, Valencia, theCanaries and elsewhere, may turn outto have been the last straw for a Span-ish government trying to avoid aninternational bailout by the EU and theIMF. As this report went to press,Spain was struggling to find the €19bnneeded to recapitalise the bank andwas hoping that EU institutions wouldprovide the money.

Mr Rajoy’s government now insists ithas regional finances under control,after Antonio Beteta, secretary of statefor public administrations, criticisedthe “excesses” of Spain’s “mini-states”.

But the prime minister himself has

not gone as far as Esperanza Aguirre, aparty rightwinger and the Madrid pre-mier, who told him he could save€48bn with a profound reform of thewhole autonomous system.

“It has not done what it was designedto do – to integrate the Catalan andBasque nationalist parties,” she said ofdecentralisation. “In fact it has justmade the operations of the other 15regions more expensive.”

The failings of poorer regions insouthern Spain and the prospect of ahumiliating bailout for the countryhave made some Catalans and Basquesfeel more distant than ever from therest of the country.

Oriol Pujol, a Catalan nationalist pol-itician, has compared Spain to “fetidwaters” that were best avoided.

“If there is [international] interven-tion, the situation in Catalonia wouldbe uncontrollable,” says Lorenzo Ber-naldo de Quirós, a conservative con-sultant and economic analyst who haslong criticised the poor management ofSpain’s regions. “Anti-Spanish feelingis running very high. The pro-inde-pendence movement would take off.”

Spain, he concludes, is neither a uni-tary state nor a proper federation.“What failed in Spain is not decentrali-sation, but a badly done decentralisa-tion. You have a state with all thedisadvantages of devolution and noneof the advantages.”

Regional difficulties undermine confidenceRegionsDevolution makes runningthe country more difficult,says Victor Mallet

Antonio Beteta

Those following news fromSpain during its financial crisishave become used to hearing ofthe bleak future facing thecountry’s youth.

Unemployment for those aged25 and under sits at more than50 per cent – the highest in theEU. Scores of students havegraduated into a stagnant jobmarket, and an increasingnumber has been forced totravel abroad in search of work.

Yet, amid the bleakest eco-nomic moment in Spain’s demo-cratic era, a less widely reportedcollection of young entrepre-neurs has established some ofEurope’s leading medium-sizedtechnology start-ups – helpingMadrid and Barcelona to punchtheir weight against the conti-nent’s traditional internet hubs,London and Berlin.

While many of these start-upshave been founded by Span-iards, a number are also runby foreigners who have chosenSpain as a base for theirbusinesses. This is especiallyencouraging for a countrystruggling to prove toa sceptical younger generationthere are sufficientopportunities for people withideas and energy.

Tuenti, the Spanish-languagesocial network bought byTelefónica in 2010, was foundedin 2006 by a mixed team of Span-iards and foreigners in Madrid.

Other successful start-upshave included Review Pro, aBarcelona-based consumer intel-ligence service for the Hotelindustry, and Jobandtalent, asocial network-based onlinerecruitment platform.

Inaki Ecenarro, 37, is one ofthe founders of Trovit, a searchengine that specialises in jobs,cars and properties. Since itsinception in 2006, the companyis now active in 37 countries.

The name Trovit is derivedfrom the Esperanto verb for “tofind”, and the company hasgrown from a small office inBarcelona to cover large parts ofthe world. While retaining itsheadquarters in Barcelona, Tro-vit now employs 70 people fromSpain and other European coun-tries, as well as further afield incountries such as Brazil andArgentina.

“Barcelona and Madrid arenot San Francisco, but they aretwo of the most important citiesin Europe for start-ups,” saysMr Ecenarro.

“We have a good talent poolhere, with a mix of foreignersand Spaniards. They are alsoattractive cities for people tolive in.”

Busuu, a Madrid-based lan-guage learning service, isanother online start-up fromSpain that has enjoyed consider-

able growth in recent years, andnow boasts 18m registeredusers, of which 9m use the com-pany’s smart phone and tabletapps. This, the company says,makes it the largest of its kindin the world.

Founded in 2008 by two MBAstudents at IE Business School,Busuu provides services in 12different languages, and allowsthose trying to learn a languageto connect with native speakers.In effect, this means that stu-dents become tutors by correct-ing their fellow users.

Busuu is named after a lan-guage from Cameroon which,according to a study in the1980s, could be spoken by onlyeight people. Bernhard Niesner,one of the company’s founderssays that Madrid has providedan ideal base.

“It is a fantastic city, with alot of sunshine and a greatyoung, vibrant atmosphere,” hesays. “It is a very nice place tolive.”

While entrepreneurs in Spainmay find it harder to raise capi-tal for start-ups than their peersin the US, there are establishedventure capitalists operating inthe country available to makeseed investments in new ideas.There are others who havefound it possible to grow simplythrough self-funding.

Mr Niesner and his partnermanaged to fund Busuu on theirown for its first two years, thenraised just €1m to fund the com-pany’s expansion.

Trovit, meanwhile, received€150,000 from Luis MartínCabiedes, a well known Spanishbusiness angel, who makesnumerous small investments innew projects each year.

“We quit our jobs when westarted, and didn’t get a salaryfor a year, so that was a biginvestment on its own,” says MrEcenarro. “People sometimessay, ‘But you haven’t investedmuch money in the business,’but we have done that by keep-ing our costs very low.”

The founders of these enter-prises argue that lower wagecosts in Spain, compared withmore established technologyand internet hubs, has helpedthem to attract strong talent ata cost that is sustainable for anascent business.

“Salaries are simply muchcheaper compared with Londonor the US,” says Mr Niesner.“The fact that we are in Madridhas been a big help, as our burnrate for staff was much smallercompared with competitors inSan Francisco, and we hadlower costs in general.”

Both companies are continu-ing to expand into new markets;Trovit is opening a site for Rus-sia, and Busuu is seeing a surgein users in Brazil. Jobandtalentlaunched in the UK in January,and will soon set up in Ger-many, while Reviewpro has3,000 clients based across 70countries.

The continuing success ofthese operations, and theirincreasing demand for webengineers and other technicalstaff has, in fact, meant thatin an otherwise supply-heavylabour market in Spain, theyare constantly battling overtalent.

“It is funny,” says MrEcenarro. “There is 25 per centunemployment in Spain but inour sector there is basicallynone.”

Future looksbright forentrepreneursStart-upsMiles Johnson findsmany new businessesin the best of health

In an otherwisesupply-heavy labourmarket, start-upsare constantlybattling over talent

When Bankia, the now infamousSpanish bank, marketed its ownshares to the general public lastsummer, it offered buyers thechance to transform themselvesinto “bankeros”.

Since the lender, formed froma shotgun marriage of seven ail-ing savings banks, asked for€19bn in state rescue funds, tak-ing the total amount of publicmoney it has received to€23.5bn, all Spaniards now findthemselves “bankeros”.

Those small savers and clientswho bought the shares – a dealthat was endorsed by the thengovernment and the Bank ofSpain – have lost more than halftheir investment and areexpected to lose much more asthe share price continues to slip.

The Bankia fiasco has indeedcome to represent the worstaspects of Spain’s attempt toreform a banking sector thathad become laden with €180bnof bad real estate developerloans built up during an aggres-sive expansion using cheap for-eign money within the country’sdecade-long property bubble.

Since the crisis began therehave been four attempts by suc-cessive governments to clean upthe sector, the latest beingfinance minister Luis de Guin-dos’ rounds of forced provision-ing imposed on banks against

property assets, bringing totalcoverage ratio up to 39 per cent.

Yet at the same time, theintervention in Bankia, whichcame after the governmentargued in February that nomore state money would beneeded to inject into banks,damaged confidence in thecountry’s ability to pay for itsbanks itself, and set in motionthe government’s calling forEuropean-wide measures tosolve the problem.

For many observers, thedrama of the last six months ofSpain’s banking crisis has beena consequence of several yearsof denial by lenders and officialsabout the extent of the problem.

This has taken a relativelysmall issue (the €121bn of exist-ing provisions make up about 12per cent of gross domestic prod-uct, and have been set asidemostly from banks’ own capitalbase) and turned it into one thathas shaken Spain to its founda-tions.

“It is as if you have beentreating cancer with homeopa-thy, and by the time you realiseit is not working it is too late,”says Gerald Corbae, a managingdirector with Alvarez & Marsal,the business consultants.

Some Spanish banks, heargues, have still not begun toadjust their loan valuations tothe new reality.

“When you are addressingthese problems it very oftenmeans writing off your debt,and in many places this is nothappening,” he said.

“Banks are still not willing toget rid of bad debts at a dis-count, and that is a big indica-

tor over their willingness to acton the problem.”

Analysts estimate another€50bn is needed to restore shat-tered confidence in the Spanishbanking sector, and help lendersbegin again to provide credit toa recession-hit economy thatdesperately needs it.

At the same time, the coun-try’s three largest banks,Santander, BBVA and La Caixa,listed as Caixabank, haveretained the confidence of muchof the financial markets thatthey are large enough and, inthe case of the first two, interna-tionally diversified enough, notto require any outside help.

“To talk simply about theSpanish banking sector is a mis-take, as there are different situ-ations throughout it,” says San-tiago Eguidazu, chief executiveof N+1, the Spanish-headquar-tered financial advisers.

“We have a dual banking sec-tor, with the largest havingstate-of-the-art provisioning bet-ter than many other Europeanbanks, and which have theirown means of coping with thesituation,” says Mr Eguidazu.

“Then there is the other partof the system, the former sav-ings banks and Bankia. That is80 per cent of the problem.”

But that 80 per cent of theproblem remains a troublingone, especially as the problemsof a few, as seen with Bankia,have had a contagious effect onsentiment towards even thehealthiest lenders in Spain.

For some practitioners, Spainwould have the greatest chanceof solving the troubles of itsbanks if it made a determinedattempt to arrange a more for-mal, sector-wide “bad bank”structure, centrally controlledand able to hive off bad assetsin a more aggressive way thanis currently planned.

“The Spanish authoritieshaven’t acknowledged the factthat there is a systemic bankingcrisis in the country,” says Jus-tin Jenk, a partner at EuropeanResolution Capital Partners, anadvisory group working withSpanish government agencies,commercial banks and investorson bank restructuring and assetresolution programmes.

For Mr Jenk, the term badbank, “a catchy but poorphrase”, does point in the rightdirection for running downproblem assets in the mediumto long term. A national “assetresolution vehicle” would beable, to secure funding, restruc-ture bad assets, and managethem, he argues.

“Until they do that, it is diffi-cult to really make the appropri-ate decisions; furthermore, theyerode their own credibility withthe markets and sources ofmuch-needed capital.

“Textbooks and precedentsshow the way forward: stabilisethe banks first, then focus onasset resolution.”

‘Bankeros’ pay for denialby lenders and officialsBanksWhat began as a smallissue is now a danger,says Miles Johnson

Bankia, formed in December 2010, has requested a bailout of €19bn, the largest in the nation’s history Getty

‘Spanish authoritieshaven’t acknowledgedthe fact that there is asystemic bankingcrisis in the country’

FINANCIAL TIMES TUESDAY JUNE 12 2012 ★ 3

Spain

Few moments in recentSpanish history have man-aged to produce a sense ofcollective achievement aseffectively as Spain’s vic-tory in the 2010 World Cup.

The pervading image ofits aftermath was of anexplosion of Spanish flagsacross the country, as if theshared and successful enter-prise had, for a moment,overcome seemingly irrec-oncilable political, socialand cultural prejudices.

It may have provided onlya temporary uplift beforethe country’s economicdebacle but, two years on,Spanish football – probablythe most talented in theworld – provides Spaniardswith something they canstill feel proud of, at a timewhen all else seems to becollapsing about them.

The recent football seasonhad Spain’s two big rivalclubs – Real Madrid and FCBarcelona – reaching thesemi-finals of the lucrativeChampions League.

Two other Spanish clubs– Atlético de Madrid andAthletic Bilbao – met in thefinal of the Europa League,the secondary club tourna-ment organised by Uefa.

Now, following anunbeaten qualifying stage,the national squad entersEuro 2012, the Europeanchampionships in Polandand Ukraine, as favourites,hoping to become the firstside to win the tournamenttwice in succession.

Even if it fails to do so,the reputation of Spanishfootball looks set to endure,with Real Madrid and FCBarça once again toppingthe Deloitte league table ofthe world’s richest clubs,preparing for a season ofconquests at home andabroad, while sharing 50per cent of the La Liga’s€618m annual TV money.

The history of Spanishfootball is littered withteams destroyed by the poli-tics of the dressing room.

But during the Francoyears it was the politicsbehind the dressing roomthat gave Spanish footballits particular dynamic, notalways in a positive sense.

At club level, it fuelledintense rivalry betweenReal Madrid, representingnationalism and centralismand Barcelona, representingsocialism and Catalanism –while failing to produce anagreed system of play atnational level that wouldguarantee success.

It was the old mytholo-gies of what constituted theSpanish race that turnedtwo earlier triumphs – thesilver medal in the 1920Olympics in Antwerp andvictory over the SovietUnion in the EuropeanNations final of 1964 – intolegends of their time: trum-peted by the regime andfans as an example of LaFuria Española – The Span-ish Fury – a phrase denot-ing virility and brute force.

This had nothing to withstyle or technique, still lessteam management, and eve-rything to do with the delu-sion of a nation capable ofconquering any enemy onaccount of its imaginedsuperior spirit.

The figure of Don Quixoteand bullfighting analogies

loomed large during theFranco period when footballbecame not just a masssport but also the nation’smost popular pastime, withfewer good toreros and agrowing number of goodfootball players, both for-eign and homegrown.

It was the doctrines ofLa Furia which led to suc-cessive national teamsunderachieving until 2008,when Spain won its firstmajor tournament in more

than four decades with atechnical, skilful, flowinggame of quick, precise pass-ing known as tiki-taka,developed by FC Barcelona.

Along with the style,came a change in politicalphilosophy, with old clubrivalries set aside by FCBarcelona and Real Madridplayers picked to play for anational squad that wasnicknamed La Roja – TheRed – by Luis Aragonés, the

coach who took Spain toEuropean victory in 2008.

Only a minority of Span-ish fans of an extreme-rightpersuasion objected to thenational team being mar-keted with a colour that forthem conjured up memoriesof communists in the Span-ish Civil War.

They also took the viewthat Aragonés wanted toingratiate himself with thethen socialist governmentof José Luis Zapatero,which was still in a pre-crisis honeymoon period.

Aragonés always deniedpolitical motives and simplypointed instead to the col-ours his players wore.

That the name La Rojawent with Spain to theWorld Cup and survived thereturn to power of the cen-tre-right Popular Party inDecember 2011 was thanksto his widely respected suc-cessor Vicente Del Bosque,a former Real Madrid playerand political conciliatorwho forged a championshipteam of Basques, Catalans,and Castilians.

A master tactician andquiet, incisive manager, DelBosque forged a rare con-sensus around football in acountry that, for most of itshistory, had struggled toagree on what constitutedthe common good.

In four years, La Roja hassecured greater followingthan any previous nationalsquad. At the same time,a majority of Spaniardsseem quite happy to see LaLiga being thrashed out byFC Barcelona and RealMadrid.

Undoubtedly, this hassomething to do with thesheer range of talent thateach club has on offer, andtheir ability to win as wellas entertain.

It may also reflect thefact that the two clubs havecontinued to financiallykeep their head above waterwhen other, smaller clubshave become heavilyindebted or gone intoadministration. Football,generally, can still provideSpain with more good sto-ries than bad ones.

La Roja: A JourneyThrough Spanish Football,by Jimmy Burns, Simon &Schuster

Victory in sport followedsea change in philosophyFootballJimmy Burns saysa game that oncedivided the nationnow unites it

The history ofSpanish football islittered with teamsdestroyed by thepolitics of thedressing room

Spain’s Fernando Torres (right) in a friendly with China Getty

As Spain finds itselfcloser to the centre ofEurope’s sovereign debtcrisis, some of the

country’s politicians and busi-ness leaders argue that the out-side world is forgetting thestrengths of its economy.

For some, the constant streamof bad news about unemploy-ment – the highest in Europe –and the weakness of certainbanks, have created a loop ofnegative feedback. Foreigninvestors read about banknationalisations and surgingborrowing costs for the govern-ment, and this stiffens theirresolve to avoid buying sharesin Spain’s companies or itsnational debt, meaning the cri-sis is exacerbated.

“The lack of confidence inmarkets means we can enterinto a vicious circle, where nega-tive expectations begin to condi-tion financial flows into Spain,”says Rafael Doménech, chiefeconomist for developed econo-mies at BBVA, a Spanish bank.

In response to this lack of con-fidence, businesses haveincreased their efforts to marketthe country’s competitiveadvantages to the outside worldby forming lobby groups andorganising special events for for-eign investors.

In January the “Spain Inves-tors Day”, a two-day presenta-tion in Madrid – in the style ofconferences organised by invest-ment banks to introduce clientsto capital providers – enabledattendees to meet 30 Spanishcompanies. There is also thebusiness council for competi-tiveness, a lobby group of com-panies from the blue-chip Ibex35 index, which producesresearch about the positiveaspects of the economy.

Yet, as the government ofMariano Rajoy is increasinglyforced to deny Spain willrequire any form of interna-

tional bailout, businesses arefinding it hard to convinceinvestors that a recovery isgoing to happen any time soon.

Madrid’s pledge to reduce thenational budget deficit fromnearly 9 per cent of grossdomestic product at the end oflast year to 3 per cent by 2013 isgenerally seen as very difficultto accomplish.

The European Commissionhas already said it doubts Spainwill be able to achieve thereduction and has offeredMadrid another year to meet itsgoal.

There is also concern thatthe government will endup choking any nascent recov-ery by adopting austerity

measures that are too harsh.Financial markets are now

expecting losses in the bankingsector to be higher than somehad believed. While a theoreti-cal final bill of an extra €50bnwould still only amount to 5 percent of GDP, because Spanish 10year borrowing costs are morethan 6 per cent, there is concernabout how the government willfind the money.

“I have long been relativelysanguine about Spain becausethe numbers – even under stressassumptions – are not that bad,and on the reform side and withrespect to the regions, the newgovernment has done well,”says Erik Nielsen, chief econo-mist at UniCredit, a bank. “But

when it comes to the banks, it’sstarting to look as possibly thegreatest fumble of the Europeancrisis.”

Mr Doménech, who helps co-ordinate research at the busi-ness council, of which BBVA isa member, argues that while thebanking reforms could havebeen more efficient, the coun-try’s so-called risk premium, orthe amount it pays to borrowcompared with Germany, doesnot reflect economic fundamen-tals.

“There is not a general prob-lem of solvency, there are someinsolvent companies in someparticular sectors, but this isnot a general problem,” he says.“The main complication now is

liquidity due to our dependencyon international financial mar-kets.”

At the same time, parts of theeconomy have demonstratedremarkable resilience in theface of recession and a lack ofcredit due to the banking crisis.

Exports have grown 36 percent since 2009, with Spainroughly maintaining its marketshare in the period between 1999and 2011. France has seenits market share of exportsshrink by 2.4 per cent, and theUK share has shrunk by 2.2 percent.

Construction, once 18 per centof GDP, has collapsed, whileother domestic sectors remainstrong. Spain is the second most

popular tourist destination glo-bally by revenues, and expectsto attract about 58m visitorsthis year.

These competitive advantagesare being obscured by anxietyabout the banks and deficitreduction, but are, economistssay, what distinguish the coun-try from other more troubledEuropean neighbours.

“The Spanish economy is nowadjusting after a very intensecrisis, and has to reallocate capi-tal and workers from sectorsthat no longer are dynamic,“says Mr Doménech. “Thisadjustment takes time and,although this process is noteasy, we are making clearprogress.”

Competitive advantages obscured by anxietyEconomyMiles Johnson pointsout that some sectors,such as tourism andexports, remainremarkably resilient

Getting in line: a queue at a government employment office in central Madrid Getty

‘When it comes to thebanks, it’s starting tolook as possibly thegreatest fumble of theEuropean crisis’

4 ★ FINANCIAL TIMES TUESDAY JUNE 12 2012

Spain

Country’s fall from grace is greatly exaggerated

Richard Boucher, deputysecretary-general of theOrganisation for EconomicCo-operation andDevelopment (OECD), hit araw nerve in April whenhe told a conference inMarseille of the NatoParliamentary Assembly:“Nobody wants to be likeSpain today”, because: “Itis only good for flamencoand red wine.”

In the audience wasDiego López Garrido,Spain’s secretary of statefor the EU in the formerSocialist government, whodemanded Boucher retractthe remarks. José ManuelGarcía-Margallo, foreignminister in the

conservative Popular Partygovernment, complainedabout the “intolerable”words, and got an apology.

The incident highlightedthe extent to which Spain’simage has deterioratedsince its deep crisis in2008. During its 14-yeareconomic boom it waslauded for creating almosta quarter of the total newjobs in the euro zone, butnow has 5.6m unemployed– almost a third of thezone’s total.

Too much of the successwas due, literally, to sand(the construction andtourism sectors), and notknowledge. The blame liesmainly with a myopicpolitical class. There arestill 700,000 new, finishedunsold homes and manywhite elephants, including

the €1.1bn airport atCiudad Real, which hasone of Europe’s longestrunways. It operatedfor less than two years,almost exclusively withtraffic of private jetsbringing wealthy huntingparties.

The Spain brand hastaken a nosedive. This ismost evident in the Madridstock market – one of theworld’s worst performersthis year – and in the risein the risk premium on 10-year government bondsover Germany’s benchmarkbunds to above 550 basispoints, at times, from anaverage of 8 basis pointsin 2007.

Nevertheless, Spain’s fallfrom grace is exaggerated.The image is out of syncwith reality, yet the

perception, for many, isthe reality.

The country has manypositive elements,including about 20multinationals with leadingpositions in the globaleconomy – far more thanItaly, for example. TheIbex 35 companiescollectively generated 60per cent of their revenuesabroad last year – up from57 per cent in 2010. Thelatest global presenceindex of the Elcano RoyalInstitute, the Madrid-basedthink tank, using objectivecriteria, puts Spain in 11thplace in the world:unchanged for a decade.

Governments since theend of the Francodictatorship in 1975 havesuccessfully “sold” abroadthe idea of the smooth

transition to democracy,but little of other changesthat have taken place. As aresult, the old stereotypesof a country of fiesta andsiesta have re-emergedwith a vengeance.

José Luis Rodríguez

Zapatero, who was primeminister from 2004 to 2011,aimed to correct thenegative image by creatinga public diplomacycommission in 2009 – alongthe lines of other countriesthat successfully rebrandedsuch as the UK and

Germany – but it failed totake off.

One problem is thatSpain needs to speak withone voice. However, its 17autonomous regions pull indifferent directions andcreate confusion abroad.

Several years ago, thegovernment of Castilla andLeón (known in Spanish asthe Junta de Castilla yLeón), sent a trade missionto New York. As it omittedto mention Spain on itspromotional literature,many people mistook theword “Junta” for a LatinAmerican militarygovernment.

“What is needed is a co-ordinated and non-partisanapproach by the public andprivate sectors, whichwould regenerate Spaininternally and not just

externally,” says EmilioLamo de Espinosa, thepresident of Elcano. It issetting up a Spain brandobservatory.

García-Margallo ismaking Spain’s diplomacymore commerciallyfocused, and promoting theSpain brand. Given thedepressed state of thecountry’s economy, thisoverdue initiative makes alot of sense. Exporterscould certainly do withmore official help: 47 ofSpain’s 118 embassies and80 consulates do not havea commercial section.

It will not be easy forSpain to change its imageand improve the brand.The country is viewed insurveys as “hot” (creative,passionate and not veryserious), as opposed to

“cold” (efficient, rigorousand serious) like Germanyand the UK. The “hot”image benefits the still-flourishing tourismindustry but not otherparts of the economy, andthe way the country isperceived abroad.

Chile was so determinedto impress upon the worldits “coldness” that itshipped a 60-tonne icebergto Seville in 1992, andmade it the centrepiece ofits World’s Fair pavilion.

Spain does not have togo to such extremes but itneeds to be more proactive.

William Chislett, journalistand author, has lived inMadrid since 1986. His newbook on Spain will bepublished by OxfordUniversity Press in 2013

Dubbingartists won’tbe silenced

For most film fans, the riseand fall of a star’s career islittle more than a footnotein Hollywood history.

However, for Spain’slegion of film dubbing art-ists who provide the Castil-ian Spanish voices for for-eign films in the country,the possibility of the origi-nal performers in Los Ange-les churning out a series ofturkeys, or heading intorehab, presents recurringrisks to their livelihoods.

Film studios prefer thatHollywood actors aredubbed by the same voicesin Spanish for each of theirfilms. This enables thedomestic audiences tobecome familiar with thedubbed voices, and regardthem as the actors’ own.

This means that thecareer fortunes of an actorcan have large conse-quences for the careers ofhis or her dubs, while theoriginal star is unlikely tomeet the multitude of dub-bing artists that translateevery performance into doz-ens of languages.

Carlos Ysbert, a Spanishactor, and head of theMadrid Association of Dub-bing Film Actors, hasworked as the voices ofJohn Goodman, HomerSimpson and James Gan-dolfini.

When the six seasons ofThe Sopranos, starring MrGandolfini as a mafia boss,came to a close, Mr Ysberthad to adjust to workingless. After more than 20years in the dubbing indus-try, he has become used tostars fading from view.

“He is a fine actor, butafter the series I am doingpractically nothing for him– maybe a few films,” hesays. “Actors get old, orhave illnesses – it happensall the time.”

These are the career risksfor which a dubbing artisthas always needed to beready, but the most success-ful, such as Mr Ysbert, mayhave numerous roles as ahedge against one star dis-appearing, or a televisionseries being axed.

More recently, dubbingartists have been drawninto a debate over theirimpact on wider society –forced to defend their pro-fession against accusationsthat the norm of Spaniardsnot watching productions inthe original language hasheld back the country’slevel of English.

The Madrid regional gov-ernment has encouragedparents to show their chil-dren films and televisionprogrammes in English, inan attempt to improve theirforeign language skills, andequip them to work in com-panies that increasinglydemand polyglots.

As part of the region’spolicy to establish bilingualschools, a special televisionlisting is produced to iden-tify all the English lan-guage cartoons and films onlocal stations.

“In this moment whenunemployment is so high,to know another languageis not only an advantage, itis becoming a prerequisite,”

says Lucia Figar, head ofeducation for the Madridregion.

“For children, I think it isevident that watching filmsin the original language canhelp,” she says.

The relatively recentreappraisal of parts ofSpain’s education system toimprove foreign languageskills is built on a generalperception that Spaniardshave a lower grasp of Eng-lish than countries from theNorth of Europe.

“It is a problem in Spain,”says Bernhard Niesner, oneof the founders of Busuu, aMadrid-based online lan-guage-learning company.“The education system,unfortunately, has not beenso good, and even now theyare thinking about gettingrid of oral exams in someEnglish degrees at univer-sity, meaning people canstudy for years and still notspeak very well.”

For Franz Heukamp, pro-fessor of Managerial Deci-sion Sciences at IESE busi-ness school, the ability ofSpaniards to speak impor-tant business languagessuch as English or Germanhas become an increasinglyhot topic since the onset ofthe financial crisis, partlydue to the rising number ofmostly young people look-ing abroad for employment.

“If they suddenly changedall dubbed films into Eng-lish, the acceptance wouldnot be high, as most people

do not speak the languagein Spain,” he says.

He does not believe thatdubbing films greatly limitsthe development of foreignlanguage skills.

“There is a wider culturalissue of how much peoplereally wanted to learn a for-eign language, but that ischanging. I don’t thinkthere is really that large adifference in language skillsamong educated people inSpain than in many otherEuropean countries.”

So why do so many Span-iards appear to believe thatthe country’s English skillsneed dramatic improve-ment? One explanation is atendency to be concernedabout a speakers’ accent,even when their commandof English is strong.

The presidents of someleading Spanish businesseshave stopped speaking Eng-lish in public after beinglaughed at in Spain fortheir performance.

“There is a tendency forpeople to self-chastise, andpeople from Spain can bevery worried about theiraccent, even when theyspeak excellent English,”Mr Heukamp says.

Meanwhile, for the filmdubbing artists, the ideathat their profession is dam-aging Spain’s educationalstandards is a sore subject.

“With an original lan-guage you might get themusicality of the film more,but it doesn’t help youlearn better English,” saysMr Ysbert. “The demand fororiginals is still very low, soI am not worried.”

‘With an originallanguage you mightget the musicalityof the film but itdoesn’t help youlearn better English’

Repsol’s travails remind business of risks

For many Spanish compa-nies, the route out of theeconomic crisis at home haslong been clear: move asmuch as your business aspossible into faster-growingemerging markets.

Last year, Ibex 35 mem-bers, who represent a vari-ety of sectors, from clothesretailing to banking andconstruction, generated€207bn of revenues, ofwhich 61 per cent camefrom outside Spain. Of that,19 per cent was derivedfrom within the EuropeanUnion, 15 per cent from theOECD, and 27 per cent fromthe rest of the world.

Inditex, the Galicianowner of the Zara clotheschain, and now the Ibex 35’slargest company by marketvalue, opened 132 outlets in

China last year, out of atotal of 483 openings glo-bally across 82 countries.

Other Spanish marketleaders, such as BBVA andSantander in banking, andTelefónica in telecommuni-cations, have found shelterfrom brutal trading condi-tions in Spain through theLatin American operationsbought before the crisis.

For the Business Councilfor Competitiveness, alobby group formed ofSpain’s largest companiesto promote the country’seconomy during the crisis,it has been these positionsin Latin America that have,in part, helped exportsremain robust since 2009.

This, the group says, “is areflection of the competitiveadvantages of Spanish com-panies and their potentialfor a big natural market:Latin America”.

However, a series of mis-fortunes that have befallenSpanish companies in LatinAmerica since the start ofthe year has reminded com-panies operating in some ofthe continent’s more politi-cally risky states that there

are still problems with thishoped-for miracle cure forSpanish multinationals.

In April, the Argentinegovernment under CristinaFernández, seized the YPFunit of Repsol, the Spanishintegrated oil group thathad depended on the sub-sidiary for a fifth of itsoperating revenues in 2011.

Two weeks later, theBolivian government expro-priated the operations ofRed Eléctrica, the Spanishelectricity grid. However,its Bolivian subsidiary rep-resented no more than 3 percent of its revenues.

For Repsol, the loss ofYPF stripped it of signifi-cant parts of its cash flowand promising explorationprospects, and serves as aparable for the powerless-ness of a company facing agovernment intent on seiz-ing its assets.

Repsol, which had pur-chased the former stateArgentine oil company in1999, appeared to be in Bue-nos Aires’ good books untillast November, when Rob-erto Barrata, Ms Fernán-dez’s representative on the

YPF board, said: “The stateis in complete agreementwith the activities the com-pany is undertaking.”

That month, Repsol haddiscovered the Vaca Muerta(“dead cow”) shale gas for-mation, estimated to con-tain more than 20bn barrelsof oil equivalent in reservesand resources, making itthe most exciting find inthe group’s modern history.

Argentina has promisingshale gas potential and,after the US and China,holds the third in terms ofpotential reserves, meaningRepsol, which had struggledearlier in the decade after areserves reporting scandal,appeared to have achievedprime position in one of theworld’s most excitinghydrocarbon systems.

Soon after the discovery,however, Ms Fernández’s

government, faced with amounting energy crisis athome due to consumerprices fixed lower than mar-ket ones, changed its tune,and showed dissatisfactionwith Repsol’s managementand investment in YPF.

Increasingly severe warn-ings from the Spanish gov-ernment did little to put thebrakes on Buenos Aires’eagerness to target YPF.

In early April, the indus-try minister José ManuelSoria, warned that “hostilegestures against the inter-ests of Spanish companieswill be interpreted by thegovernment as hostilityagainst Spain and the Span-ish government,” and that:“If there are gestures ofhostility, there will be con-sequences.”

Less than a week later,Ms Fernández announcedthe state would seize 51 percent of YPF, sending Rep-sol’s share price tumblingfurther after being weigheddown by weeks of specula-tion, and prompting a diplo-matic row between Madridand Buenos Aires.

Repsol has since pre-

sented its investors with anew strategic plan to growwithout its Argentine oper-ations, and has called for atleast $10bn in compensationfrom Buenos Aires, and forinternational arbitration.

More difficult for Repsolis the queue of interna-tional investors seekingcompensation from Argen-tina following its default atthe start of the last decade,and experts feel the Spanishcompany could wait a longtime before it sees anymoney.

“This may become quite aprotracted saga,” says AndyMoody, partner at Ever-sheds, the international lawfirm. “Argentina has beenknown not to pay out underarbitral awards madeagainst it.”

While Repsol’s travails inArgentina are not seen byanalysts as having implica-tions for companies operat-ing in larger, more politi-cally stable markets inLatin America, the seizurewill remind executivesthere are benefits to doingbusiness in your homeeconomy, even in a crisis.

Energy investmentSome are countingthe cost ofventuring abroad,says Miles Johnson

Producerstry to temptwider rangeof palates

To say that wine is of his-torical, social and eco-nomic importance toSpain is something of an

understatement.Vines are grown in every one of

the country’s 17 autonomousregions – not just in internation-ally known viticulture areas suchas La Rioja, Galicia, Catalonia’sPriorat or on the banks of theRiver Duero (Douro in Portugal) –but also in Madrid and theCanary Islands.

Spanish wine has been exportedfor more than two millennia andwas once supplied to the rest ofthe Roman empire. In the MiddleAges, local vineyards provided thecommunion wine required inRoman Catholic churches from

one end of the country to theother. According to Rafael delRey, director-general of theObservatorio Español del Mercadodel Vino (OEMV), an industryresearch foundation, the nearly1m hectares under cultivation isthe largest wine area of any coun-try, although the dry climatemeans Spain produces less winethan France or Italy.

The generally high quality ofeven cheap wine is one of thecountry’s best kept secrets, per-haps because too many indifferentSpanish bottles were exported inthe second half of the 20th cen-tury.

Today, in the depths of thecountry’s gravest financial andeconomic crisis since the restora-tion of democracy in the 1970s,quality food and wine havereasserted themselves as vitalexport sectors helping to keep theeconomy afloat in spite of theprospect of an international bail-out by the EU and the Interna-tional Monetary Fund.

“This is what we call goodnews,” says Mr del Rey, notingthat Castilla-La Mancha, in thecentre of the country, has more

acreage producing wine grapesthan the whole of Australia.

And some of the wine is of verygood quality, winning prizes andattracting favourable reviewsfrom international wine experts.Experience suggests that anyoneprepared to spend at least €10 ona bottle would be hard pushed tofind a bad one.

“Spain has an excellent price-quality relationship,” says FélixSolís, export manager of the winecompany of the same name.

“This year and last there hasbeen a very positive trend inexports. We need to switch thatfrom bulk exports to high qual-ity.”

While wine consumption in thecountry has fallen steadily for 20years, exports have risen sharplyto reach 21.3m hectolitres in 2011.Seven years ago, more wine wasconsumed in Spain than was soldabroad: exports today – worth€2.24bn last year – are more thandouble local consumption.

With imports worth a tenth thevalue of exports, wine makes asignificant contribution to thecountry’s effort to move its cur-rent account into surplus andreduce dependence on foreigncreditors. Those involved in thishighly competitive business wantto make sure Spain does not fallinto the trap of lowering the price

of its wines too far in the hunt formarket share.

The international wine tradeburgeoned in the 1990s, providingopportunities for new-world wineproducers and also for the estab-lished European growers. “It wasmassive for us but also for ourcompetitors,” says Mr del Rey.

“We looked at what Chile, Aus-tralia and so on were doing. Wesaw that there was a larger worlddemand for wine. We saw thatthere were new competitors tak-ing advantage of that newdemand. Obviously, the questionwas: ‘What should we do?’.”

With markets such as Chinarapidly becoming big importers,producers decided to sell winesthat would appeal to a broaderrange of customers and not onlyto traditional European drinkersaccustomed to weighty reds.

“In large parts of the US andBritain, and now in China, con-sumers are looking for somethingmore fruity and more sweet. Andwe as a country have to decidewhether we want to find a con-sumer for our wine, or adapt ourproduction to the consumer. Prob-ably we’ll do both.”

Mr Solís agrees that consumersfrom countries that do nottraditionally make wine, particu-larly in Asia, tend to like a fruit-ier product. “They like less com-

plicated wines, easy wines todrink.”

Some producers fear there aregrowers, perhaps because they arestricken by the economic crisis,who are too eager to sell theirproduct at any price. In short,they are dumping wine.

“The numbers look nice on theoutside – there’s growth inexports,” says Victor Redondo,chief executive of United Winer-ies, which sells mostly Spanishwine. “But when you look atthese numbers in greater detail Ibelieve it’s pretty bad for Spain.Seventy per cent of exports arebulk. And we have first-world sal-aries for third world [commodity]exports. In the longer term that’sunsustainable.”

OEMV statistics back him up.Volume, and to a lesser extentvalue, of exports reached records,but the average wholesale priceper litre of exports – exactly €1 in2011 – is lower than for more thana decade.

In the longer term, Mr Redondois optimistic the sector will bereformed and improved by theprice squeeze, although in theshort term even the eventual sur-vivors will find it tough. “I believeSpain as a nation is going to real-ise we need to add value to all wedo, whether it’s wine or cheese orham or olive oil.”

WineThe high quality ofeven cheap bottles isone of the country’sbest kept secrets, saysVictor Mallet

Grape expectations: Castilla-La Mancha has more acres producing wine grapes than Australia Alamy

LanguagesMiles Johnsontalks to voice actorscharged withharming education

Guest ColumnWILLIAM CHISLETT

‘Exporterscould do withmore officialhelp’ –WilliamChislett

CristinaFernández:seized theYPF unit ofRepsol, theoil group

Spanish wine exportsValue and volume

500

1000

1500

2000

2500

1995 2000 05 11

Value (€m)

Volume(millionsof litres)

Spanish wine production

Source: Observatorio Español del Mercado del Vino

Million hectolitres (financial years)

0

5

10

15

20

1988 90 95 2000 05 11

Exported

Consumed in Spain