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Last Updated: July 2010

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Spain

	Score	Rank
Financial Standards Index	56.67 out of 100	22
Business Indicator Index	11.23 out of 12	4

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12 Key Standards Overview
Summary by Standard
Business Indicator Summary
Quick Facts & Global Indices

Overall Standards Summary

Spain achieves medium overall compliance with international standards and codes, with a score of 56.67 out of 100 in our Standards Compliance Index. Spain's compliance in the area of Macroeconomic Policy and Data Transparency is high. Spain has been caught in the euro zone’s fiscal crisis, and as a result an ambitious fiscal consolidation is underway to reach the EU’s three percent (of GDP) deficit target rate by 2013. Regarding Institutional and Market Infrastructure standards, compliance levels are mixed. In 2009, Royal Decree Law No. 3 was passed, which contains new insolvency provisions and other related legislative changes to address potential problems that the global financial crisis had brought to light. Also, International Standards on Auditing are expected to be incorporated into the national standards over the course of 2009-2010. Although, Spain opted for the extended use of International Financial Reporting Standards (IFRS) as of January 2005, other companies must follow Spanish Generally Accepted Accounting Principles, which still differ from IFRS. Spain joined TARGET2 with the second wave of countries in February 2008. Thus, TARGET2 is now Spain’s sole systemically important payment system, which according to the European Central Bank observes all the Core Principles for Systemically Important Payment Systems. Spain’s compliance with the Financial Regulation and Supervision standards is high, with the exception of insurance supervision, since its regulatory framework does not provide specific requirements on risk assessment and management and weaknesses were also identified in terms of the independence and governance of the insurance supervisory authority.

Choose a standard for a detailed compliance report:

12 Key Standards for Sound Financial Systems	Compliance Level
Special Data Dissemination Standard	CP
Code of Good Practices on Transparency in Monetary Policy	FC
Code of Good Practices on Transparency in Fiscal Policy	CP
Effective Insolvency and Creditor Rights Systems	II
International Financial Reporting Standards	NC
Principles of Corporate Governance	EN
International Standards on Auditing	ID
Anti-Money Laundering/Combating Terrorist Financing Standard	ID
Core Principles for Systemically Important Payment Systems	FC
Core Principles for Effective Banking Supervision	CP
Objectives and Principles of Securities Regulation	CP
Insurance Core Principles	ID
II = Insufficient Information \| NC = No Compliance \| ID = Intent Declared \| EN = Enacted \| CP = Compliance in Process \| FC = Full Compliance

Macroeconomic Policy and Data Transparency

CPSpecial Data Dissemination Standard

Spain has been a subscriber to the International Monetary Fund's (IMF) Special Data Dissemination Standard (SDDS) since September 1996. An IMF’s 2007 Article IV report notes that Spain's economic data is "adequate for surveillance." The IMF's SDDS website discloses that the country meets or exceeds all specifications for coverage, periodicity, and timeliness for all data categories. However, the timeliness flexibility option is invoked for data on central government operations. Spain also publishes advance-release calendars for all datasets, and disseminates its data simultaneously to all interested parties, primarily through the website of the data generating agency. There are some issues arising with regard to the integrity dimension, in that there are several cases where no information is provided regarding the inclusion of ministerial commentary with data on the SDDS website. Finally, although Spain fulfills most quality-dimension requirements, it fails to provide the SDDS website with information regarding the dissemination of component detail and statistical frameworks for its central government operations and population data.

FCCode of Good Practices on Transparency in Monetary Policy

Spain adopted the euro at the launch of the European Monetary Union (EMU) in January 1999, and thus, its monetary policy is no longer governed by the Spanish central bank. Rather, the Governing Council of the European Central Bank (ECB) determines Spanish monetary policy, and the Eurosystem (consisting of the ECB and the central banks of the member states that have adopted the euro) is responsible for its implementation. According to the IMF, the Eurosystem and the ECB maintain high transparency standards and a commitment to openness. The ECB observes the IMF's standards for monetary policy transparency and pursues an active policy of communication with the public. The sovereign debt crisis in the euro area, triggered by Greece's near-default revealed serious problems of economic governance in the monetary union. At the height of crisis the European Financial Stability Facility was set up by the 16 euro member countries to provide a funding backstop should a euro area Member State find itself in financial difficulties. In addition, to address the shortcomings revealed by the crisis, the European Council of heads of state has established a task force on economic governance, which is due to report at the end of October 2010.

CPCode of Good Practices on Transparency in Fiscal Policy

In 2005, the IMF published a fiscal transparency module of its Report on the Observance of Standards and Codes (ROSC) for Spain. According to this report, Spain "fully meets or exceeds" the IMF’s Code of Good Practices on Fiscal Transparency in many areas. It has modernized and strengthened its fiscal institutions, and it has made progress in the dissemination of information regarding the government's fiscal activities. While the ROSC was positive in many respects, it did identify areas in which improvements could be achieved. For example, Spain could permit external scrutiny of the government's macroeconomic forecasts and assumptions. It could make public both its macroeconomic forecasts and the models on which the forecasts are based. The ROSC also found that coverage of government operations in budget documents was relatively comprehensive, but complained that the information was dispersed. It suggested that compilation be done, so that the information is more easily accessible to the general public. Lastly, the ROSC noted that the assignment of supervisory responsibilities for budget execution is confusing. The Ministry of Economy and Finance is responsible for executing the budget; the General Directorate of the Budget is in charge of budget modifications; the Directorate General for the Treasury handles cash and debt management; and the General Controller and Accounting Directorate oversees internal control, audit, accounting, and reporting. The IMF recommended that these duties be streamlined. Spain is part of the euro zone countries experiencing severe fiscal crisis. A 2010 IMF mission to Spain acknowledged that the government has taken a wide range of measures, but cautioned that implementation will be most critical. The mission also encouraged bold pension reform to reduce spending pressure and a stronger fiscal framework to guarantee that Autonomous Communities, where the bulk of spending occurs, deliver the needed adjustment.

IIEffective Insolvency and Creditor Rights Systems

According to a report prepared for the European Commission in 2003, as of 2002, Spain fully adopted 9 of the Principles and Guidelines for Effective Insolvency and Creditor Rights Systems developed by the World Bank, almost fully adopted 9 principles, partially adopted 12 principles, and did not adopt 11 principles. The insolvency system in Spain overall was found to be not conducive to the revival of companies in financial distress, nor did it offer a reasonable recovery rate for creditors. In June 2003, however, the Spanish Parliament approved a new, modern bankruptcy law that entered into force in September of 2004. The reform legislation aimed at simplifying insolvency proceedings in Spain and supporting the viability of companies in financial distress. As reported by Nunez-Lagos, in 2009 the Spanish legislature took its insolvency legislation further under renewed consideration to address potential problems that the global financial crisis had brought to light. As a consequence, Royal Decree Law No. 3, passed in March of 2009, contains new insolvency provisions and other related legislative changes. The legislature also appointed a commission to study the nation's insolvency law with an eye to drafting more sweeping reform in the near future. There is, however, insufficient information as to the compliance of the new requirements with the World Bank Principles.

NCInternational Financial Reporting Standards

In line with the European Commission (EC) Regulation No. 1606/2002, since January 1, 2005 listed companies in Spain have been required to prepare consolidated accounts following International Financial Reporting Standards (IFRSs) as endorsed by the EU. In addition, according to a 2008 EC report on the implementation of the Directive, Spain opted for the extended use of IFRSs allowing unlisted groups to apply either Spanish General Accepted Accounting Principles (GAAP) or IFRSs. Financial instituions are required to follow the rules set by the Central Bank of Spain which are in conformity with the EU-based IFRSs. Other companies must follow Spanish GAAP which, according to a PricewaterhouseCoopers (PwC) 2010 publication, was revised as a result of corporate and accounting law reforms in 2006 effective for application by individual companies and unlisted consolidated groups since 2008. Although based on IFRSs, PwC notes that the new Spanish GAAP has only been partially converged with IFRSs, and still differ from the international standards.

ENPrinciples of Corporate Governance

Numerous publications on the subject point out that Spain has been making efforts to improve the transparency of capital markets and its corporate governance practices. Spain started to modernize its commercial laws and regulations following its accession to the European Union in 1986. In 1998 and 2002, the Olivencia Report and the Aldama Report established codes of business practices and ethics by way of recommendations. The May 2006 Unified Code on Good Corporate Governance merged these older codes and took into account international recommendations, including the Organisation for Economic Co-operation and Development (OECD) Principles of Corporate Governance. They were made mandatory for listed companies. In 2007, a OECD report noted that minority shareholders are well protected in Spain. More recently, a June 2010 article available on the International Financial Law Review website reiterates various initiatives made by Spain which, the authors assert, resulted in a “high degree” of market transparency. In particular, the report mentions the implementation of the European Directive on transparency in 2007 and the overall strengthening of disclosure requirements. In addition, a draft bill titled “The Sustainable Economy Law” , when passed, is likely to introduce changes in the provisions on executive compensation and also formalize the definition of independent directors. Despite these efforts, weaknesses still persist and recent reports by Vives and the U.S. Department of Commerce point to a general lack of disclosure and independent directors on boards.

IDInternational Standards on Auditing

According to a 2007 self-assessment prepared by the Institute of Auditors of Spain (ICJCE), the auditing standards applicable in Spain are the official translations of International Standards on Auditing (ISAs), sometimes modified to reflect the local legal environment. A 2010 report by the International Federation of Accountants (IFAC) notes that the latest version of ISAs – the so-called Clarified ISAs – are expected to be incorporated into the national auditing standards over the course of 2009-2010. As a member state of the European Union (EU), Spain is required to comply with the requirements of EU Directive No. 2006/43/EC, which mandates all statutory audits to be carried out on the basis of international standards on auditing, as adopted by the European Commission. Although such standards are currently pending adoption by the EU, it is widely anticipated that ISAs as issued by the International Auditing and Assurance Standards Board will be adopted. According to a 2010 EC publication, Spain is expected to fully transpose this Directive by the second half of 2010.

IDAnti-Money Laundering/Combating Terrorist Financing Standard

In 2006, the Financial Action Task Force (FATF) conducted a mutual evaluation of Spain's Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) regime against the FATF's forty recommendations and nine special recommendations. In its published findings, the FATF concluded that Spain was compliant with 10 FATF recommendations and special recommendations; largely compliant with 22; partially compliant with 12; non compliant with 3; and two recommendations were found not applicable to Spain. However, Spain was rated only partially compliant with Recommendation 5 (on customer due diligence), designated as a core recommendation by the FATF. A country needs a largely compliant or compliant rating for the core recommendations to be deemed as having in place a proper functioning AML/CFT regime. The report noted that there were areas where Spain's AML/CFT regime could be improved. For example, while concluding that the terrorist financing offences were broadly satisfactory, the FATF report observed that these offenses did not appear to cover acts of an individual terrorist not related to a larger terrorist group and the collection of funds under some circumstances. Further, customer due diligence measures were lacking in the financial sector and in the designated non financial businesses and professions. Additionally, the FATF report stated that, due to Spain's lack of comprehensive statistics on prosecutions and convictions relating to money laundering and terrorist financing, the effectiveness of the AML/CFT offences and measures was difficult to assess more precisely. In its 2008-2009 Annual Report, the FATF names Spain as one of the countries that has committed to adopting the organization's 40 recommendations and 9 special recommendations.

FCCore Principles for Systemically Important Payment Systems

Prior to 2008, Spain’s payment systems consisted of the Servicio de Liquidación del Banco de España (SLBE), a large value, real-time gross settlement system, and the Sistema Nacional de Compensación Electrónica (SNCE), the country’s retail payment system. SLBE was Spain’s component of the Trans-European Automated Real-time Gross Settlement Express Transfer (TARGET) system, the pan-European payment system. However, in November 2007, TARGET2 replaced TARGET and payment services were harmonized under a single shared platform across its member countries. Spain joined TARGET2 with the second wave of countries in February 2008. Thus, TARGET2 is now Spain’s sole systemically important payment system (SIPS). According to a 2009 European Central Bank assessment of TARGET2 against the Core Principles for Systemically Important Payment Systems (CPSIPS) promulgated by the Committee on Payment and Settlement Systems, TARGET2 observes all CPSIPS. Also, information from various sources indicates that Spain's central bank, the Bank of Spain, complies with the responsibilities of a central bank in its oversight of payment systems.

CPCore Principles for Effective Banking Supervision

Based on the findings of the IMF's 2006 detailed assessment, Spain complies with 26 of the 30 Basel Core Principles (BCPs) for Effective Banking Supervision (considering that Principle 1 is divided into 6 subsections) and largely complies with the remaining four. According to the IMF report, banking supervision is effectively carried out by the Bank of Spain (BdE), which has developed an effective risk-based supervisory prudential framework. At the national level, the BdE and the Ministry of Economy and Finance are responsible for the regulation and supervision of credit institutions. As Spain is divided into 17 regions, also known as autonomous communities (CAs), each CA is provided with licensing and sanctioning authority, and power to oversee the activities of saving banks (cajas). The IMF assessment found the limited regulatory and sanctioning powers of the BdE a drawback. There was also a risk for conflict of interests between the BdE and the CAs with regards to the dual legal framework governing cajas. The BdE was advised to issue further guidelines on best banking practices, with a clear emphasis on promoting effective risk management. More recent IMF reports still praise Spain for its strong bank regulatory and supervisory framework and sound, well-capitalized, and well-provisioned banks and mention ongoing reform and consolidation, especially of the cajas. Spain has also continued the process of transposing the EU directives that adopt Basel II into national law.

CPObjectives and Principles of Securities Regulation

Spain appears to meet the preconditions for an effective regulatory framework for capital markets and the provision of financial services, as stated in the IMF's 2006 Detailed Assessment of Spain's compliance with the International Organization of Securities Commission's (IOSCO) Objectives and Principles of Securities Regulation. Twenty-five of the thirty IOSCO principles were found to be fully implemented, two principles were broadly implemented, and two – related to self-regulatory organizations (SROs) - were considered to be not applicable, since market operators in Spain do not qualify as SROs. Finally, Principle 30 on clearing and settlement systems was assessed as part of the IMF's 2006 Detailed Assessment of Spain's Observance of the Committee on Payment and Settlement Systems (CPSS)/IOSCO Recommendations for Securities Settlement Systems, which found Spain to be in high compliance with CPSS/IOSCO Recommendations. The IMF report on compliance with IOSCO’s principles identified a few areas that still require action. In particular, the Spanish regulatory framework could be further strengthened by enhancing the oversight and sanctioning powers, as well as the institutional and operational independence of the securities regulator--the National Securities Market Commission. Progress on both these fronts is still pending, as a more recent (2009) IMF report finds. At the European Union level, the Prospectus Directive, the Market Abuse Directive, the Takeover Directive, the Markets in Financial Instruments Directive and the Transparency Directive have been transposed into Spanish law. Implementation of the above IMF’s recommendations is still pending, notes a 2008 IMF Article IV report.

IDInsurance Core Principles

The IMF's 2006 detailed assessment, in which insurance supervisory practices in Spain were benchmarked against the Insurance Core Principles (ICPs) promulgated by the International Association of Insurance Supervisors in 2003, concludes that Spain fully observes 17 of the 28 ICPs, largely observes 6 ICPs, and partly observes 5 ICPs. While insurance supervision and regulation rely on a clear legal framework, the regulatory framework does not provide specific requirements on risk assessment and management. Weaknesses were also identified in terms of independence and governance of the supervisory authority-the Directorate General of Insurance and Pension Funds (DGSFP)-specifically its reliance on the Ministry of Economy and Finance (MEH) to issue legally binding secondary regulation. In addition, Spain lacks requirements on corporate governance for insurers, regular analysis of market conditions, and group-wide supervision of financial conglomerates in the insurance sector. Responding to the IMF assessment, the DGSFP noted that legislative amendments were expected to be adopted to bring Spanish regulations in line with the IMF recommendations, notably in the areas of licensing, suitability of persons, corporate governance, internal control, investments, financial derivatives and Anti-Money Laundering and Combating the Financing of Terrorism. As observed by the IMF's 2007 and 2008 Article IV reports, recommendations to separate insurance supervisory functions from the MEH have been put on hold and a proposal to launch a “twin peaks” model with solvency regulation under the Bank of Spain and consumer protection under the National Securities Market Commission is also stalled.

Business Indicators

With an overall score of 11.23/12, Spain is at standard on the economic, legal, and political indicators that make up our Business Index. Spain is a market-based economy, although total government expenditures, including consumption and transfer payments, are "relatively high." Due to the global economic downturn and the subsequent country’s housing bust, Spain fell from being one of the leading European Union economies to the EU country with the highest unemployment rate and the only one slated to have negative growth again in 2010. Spain's foreign investment legislation permits foreign investors to own 100 percent of equity in most sectors, and permits the free movement of capital. Spain liberalized its foreign investment legislation to open up sectors such as telecom and energy, which has increased the country’s inward investment level. Spain has high tax rates, with a top income tax rate of 43 percent, and a top corporate tax rate of 30 percent. Property rights are protected under Spanish law, and enforced at both the administrative and judicial levels, and although protection is effective, the system is slow. Intellectual property rights are recognized and protected as well, offering protections that meet or exceed those established under European Union standards. Headed by Jose Luis Rodriguez Zapatero, the centre-left Spanish Socialist Workers' Party also won the elections in March 2008, and while not considered as business-friendly as the Popular Party government, the Socialist Party nonetheless follows a pro-globalization course. Spain’s corruption level is of no concern as reflected in the country’s high ranking in the Transparency International's 2009 Corruption Perception Index.

Global Indices & Quick Facts

Spain is ranked in the 1st or 2nd quintile in the global indices benchmarking political, economic, business, and human capital climates, as shown below. It is characterized by a well-functioning democratic and market-based economy with low corruption. Despite its relatively high score in the Heritage Foundation Index, Spain remains relatively weak in fiscal freedom and government size, with total government spending amounting to almost two-fifths of GDP. Furthermore, other factors such as restrictive labor regulations, relatively poor access to financing, and an inefficient bureaucracy remain problematic for doing business, as is highlighted by the Global Competitiveness Index.

Name	Year	Rank	Score	Quintile
Bertelsmann Transformation Status Index	2010
Heritage Foundation Economic Freedom Index	2010	36/179	69.6%	2
Economic Freedom of the World Index	2009	39/141	7.32/10	2
World Economic Forum Global Competitiveness Index	2009	33/133	4.59/7	2
Milken Institute Capital Access Index	2009	27/122	6.33/10	2
World Bank Ease of Doing Business Index	2009	62/183	N/A	2
UNDP Human Development Index	2009	15/177	0.95/1	1
Transparency International Corruption Perceptions Index	2009	32/180	6.1/12	1
Freedom House Index	2009	Free	1/7

Credit Ratings

AA+/Stable Fitch

Aaa/Stable Moody's

AA+/Negative Standard & Poor's

Macroeconomic Data

2009 GDP (Current Prices): 1397.2 billion USD (IMF)

2009 GDP (Per Capita): 30,251 USD (IMF)

2010 GDP (Growth Forecast): -0.7% (IMF)

2009 Inflation (CPI): -0.3% (IMF)

2008 Unemployment: 13.9% (CIA)

2008 Foreign Direct Investment

FDI (Inward): 65.5 billion USD (UNCTAD)

FDI (Outward): 77.30 billion USD (UNCTAD)

2007 Official Development Assistance

ODA (Received): N/A million USD (OECD)

ODA (Disbursed): 5,140 million USD (OECD)