The economic background

The global economy recovers in 2010, but the recovery varies across regions.

In 2010 the global economy recovered from the major slump of 2009, with GDP picking up from a fall of 0.6% to a rise of 4.8%. This figure is not far from level in the years immediately before the start of the crisis in the Summer of 2007. However, the economic recovery is not evenly spread across regions. Emerging economies, particularly those in Asia and Latin America, have shown the most robust progress and are turning into the major drivers of global growth.

Three elements have given shape to the economic developments in the different zones.

First, the focus of attention has continued to be the level of tension in the financial markets and the various measures that the authorities were taking to counter it. But unlike what happened in 2009, in 2010 the origin and development of the problems has been more limited in Europe and, specifically in the government debt markets, although tension has at times spread to other regions and other assets. This difference was consolidated in the markets by stimulating activity through fiscal policies and guaranteeing the sustainability of the public accounts. The peripheral countries in the Euro zone have been most affected in this respect, as some of them combined high deficit levels in their public accounts with reduced growth prospects. The European stabilization mechanism was launched in the spring of 2010. Greece was the first country in which a “rescue” plan was undertaken by the International Monetary Fund (IMF) and the European Union (EU).

Doubts about the sustainability of the public accounts in other European countries and the state of some segments of the European financial system gave rise to intense contagion, which resulted in a de facto closure of the markets. The seriousness of the situation led to awareness of the need to implement firmer measures. All of the European governments presented fiscal consolidation plans, which were subsequently strengthened, with the aim of achieving a deficit of 3% by around 2013.

These plans as a whole have allowed some distinction to be made between different assets. The fiscal consolidation measures were accompanied by structural measures in those countries most affected by problems of competition and financing needs.

However, in the Summer of 2010 tension returned, mainly as a result of renewed doubts regarding the European financial sector. The authorities reacted with the publication of the financial system’s stress tests under a scenario that was unlikely but of great impact.

The results confirmed the good health of the European financial system, while the solvency problems have been kept well in check. These stress tests were particularly demanding in the case of the Spanish financial sector, both in terms of coverage (practically the entire system) and the severity of the starting assumptions. They gave added credibility to the Bank’s performance in Spain, demonstrated the soundness of the system and made it clear that it includes some of the most solvent financial institutions in Europe. These results undoubtedly led to the gradual opening up of the market and the subsequent asset differentiation.

The results of the stress tests have confirmed the good health of the Spanish financial system.

Towards the end of 2010 tension began to reappear. This time it was the result of very different problems in Ireland and Portugal. The public accounts of the Irish economy were threatened by the huge injections of capital that its financial system had needed due its declared solvency problems, which have been estimated at 30% of its GDP. In the end, Ireland needed an assistance plan from the IMF and the EU. In the Portuguese economy, in contrast, the weakness of the financial system is more a question of liquidity than solvency, but its public accounts still had problems in complying with the objectives set out, while doubts persisted regarding the economy’s potential for growth. In addition, tensions were heightened by the uncertainty about the new European governance mechanisms and in particular by the details of the new permanent mechanism for sovereign debt restructuring, which will be in place from 2013 once the current framework approved in May expires.

No return to recession is expected in the United States: rather, a gentle slowdown.

The second element that has shaped 2010 has been the cyclical doubts on the United States economy and the response in terms of economic policy, both the new monetary expansion introduced by the Federal Reserve (Fed) known as quantitative easing 2 (QE2) and new expansionary fiscal policies. The swift recovery shown by the United States. at the end of the 2009 lost steam at the start of 2010, although growth was maintained throughout the year, making the final rate close, on average, to 3% in 2010. This loss of intensity reflected weak private demand as the fiscal stimuli of 2008 and 2009 were withdrawn. The result was renewed fears about a double dip recession, though this scenario has subsequently been ruled out by data and action on economic policy. Even so, the recovery is still extremely limited due to three factors. First, the gradual loss of strength in the real estate market as the stimulus programs for home buying expired; second, the weakness of the labor market; and finally, the household deleveraging process, which is still underway. The United States is relatively isolated at present from pressure in favor of fiscal consolidation. Nevertheless, the main thrust of economic policy at the end of 2010 came from the Fed, which initiated a new program of monetary expansion that has initially led to a downward pressure on interest rates and a significant depreciation of the dollar. In any event, no return to recession is expected in the future, but rather a gradual slowdown from the high rates of growth posted at the end of 2009 and the start of 2010.

Asia and Latin America have recovered their growth and output levels.

Finally, 2010 was also notable for the collateral effects of relaxed economic policies in advanced economies, in particular monetary policies. This gave rise to growing dilemmas in emerging economies in Asia and Latin America. These economies have been quick to recover growth and output to pre-crisis levels and have hardly noticed signs of slowdown, even though the authorities have introduced measures to prevent economic overheating, particularly in the countries most affected by the steep increases of some asset prices. The new monetary expansion in the United States has introduced an added cost, given that the dollar’s depreciation represents a greater incentive for assets with greater risk. Some of these economies are facing growing capital inflows that are putting additional pressure on exchange rates. As a result, some countries have introduced measures to limit capital inflows and slow down credit growth.

Even so, growth in South America continues to be sound, with GDP for the region closing 2010 at a growth rate above 5%. Private demand is replacing the economic policy stimuli adopted as the main source of recovery. Although inflation is maintaining a moderately upward trend, it is still not a problem. In China, the latest output indicators suggest a renewed GDP surge accompanied by a rise in inflation. This has led to an increase in both the reserve ratios and interest rates, in a clear sign of commitment to rebalance the economy which nevertheless closed 2010 with a GDP increase of around 10.3%.

The Mexican economy benefited from the recovery in foreign demand in the United States over the first half of 2010. In the second half of the year, Mexico proved resistant to weaker foreign demand, as the reduced pull of the U.S. economy was compensated by a surge in domestic demand. As a result, growth rates eased less sharply than expected, with 2010 growth ending around 5%. Inflation closed at an all-time low of 4.4% as a result of the appreciation of the peso, moderate international prices and the lack of pressure from domestic demand. Nevertheless, the monetary pause will probably remain in place at least throughout 2011. Finally, in a global financial environment focused on fiscal sustainability, the commitment to a balanced budget is a particular strength of the Mexican economy.

In Turkey, the economy recovered in 2010, with a growth of 7.6% and inflation slightly under the Central Bank’s target. At the same time, public debt reduction is picking up speed. Given this situation, the Central Bank has lowered the official interest rate and controlled credit with increases in the bank’s short-term reserve requirements.

Long-term interest rates, both in the United States and in Europe, have moved consistently in line with the perception of the strength of the cyclical recovery. In the second and third quarters, the trend was downward, while in the fourth quarter, as positive surprises in economic activity reduced the risks of a double-dip recession and a recovery began, the trend was reversed. The continuity of low official interest rate policies in developed countries is expected to limit upward movements on the public debt yield curves over the coming months.

On the foreign exchange markets the dollar’s trend was for moderate depreciation against Asian and Latin American currencies during the year. This was interrupted in May due to greater risk aversion (the safe-haven effect), but was resumed in June and encouraged after the summer as a result of the anticipation of greater asset purchases by the Fed (QE2). The euro depreciated significantly against the dollar in the first half of the year. It was further weakened by the increased tension in the European periphery in the second half of the year. In all, as an annual average the dollar appreciated 5.2% against the euro. This combination of a weak euro and the strength of the emerging currencies against the dollar resulted in a generally favorable performance of the currencies with the greatest weight in BBVA’s financial statements, with significant appreciations in the currencies of Mexico, Colombia, Peru and Chile. As a result, the effective exchange rate is positive in a year-onyear comparison, despite the devaluation of the Venezuelan bolivar. With respect to year-end exchange rates the Venezuelan bolivar depreciated due to the devaluation early on in the year. The other currencies with an impact on the Group’s balance sheet appreciated, so their effect is positive on balance sheet items and business. In 2011 the forecast is for further appreciation of the dollar against the euro, while emerging currencies have room for appreciation against the dollar.

The economic recovery will be consolidated in 2011, although with a certain slowdown.

With respect to prospects for 2011, the global economic recovery is expected to be consolidated, although the most probable scenario is for some slowdown. The rise in global GDP could be around 4.4%, barely below the figure for 2010. This growth will vary, and in most advanced economies it will be subject to risks and uncertainties that have still not been cleared up. Among the advanced economies, the United States will once again lead the growth table. However, although some factors still limit the growth of private-sector demand (the real estate sector, the labor market and the deleveraging process) and make it difficult for growth to return to something close to its potential, GDP is still expected to grow at 3% in 2011. In Europe, although some countries have had surprisingly good results (particularly Germany), a modest growth is expected of around 1.7%. The Spanish economy, which was sluggish in 2010, could begin a process of recovery, but it will still be weak and insufficient to create jobs. Forecasts suggest a GDP growth slightly below 1% (-0.2% in 2010). Progress will be strong in emerging economies. Asia, with China leading the way, will once more be the region with the highest growth, which will remain over 6% for Asia as a whole, and above 9% in China. These figures are very positive provided that the risks of inflation and overheating can be reduced. The recent strength of Latin America will be maintained, with a greater contribution from domestic demand in an environment of favorable commodity prices. Growth over 4% is expected for the region as a whole, and over 4.3% for Mexico. Finally, the Turkish economy will continue buoyant in 2011, with a growth of 4.5%.

Interest rates

(Quarterly and annual averages)



Year 2010 4Q 3Q 2Q 1Q Year 2009 4Q 3Q 2Q 1Q
Official ECB rate 1.00 1.00 1.00 1.00 1.00 1.25 1.00 1.00 1.10 1.92
Euribor 3 months 0.81 1.02 0.87 0.69 0.66 1.22 0.72 0.87 1.31 2.01
Euribor 1 year 1.35 1.52 1.40 1.25 1.22 1.61 1.24 1.34 1.67 2.22
Spain 10-year bond 4.28 4.73 4.23 4.19 3.95 4.02 3.83 3.92 4.16 4.17
USA 10-year bond 3.19 2.86 2.77 3.47 3.70 3.24 3.45 3.50 3.30 2.70
USA Federal rates 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25
TIIE (Mexico) 4.91 4.87 4.91 4.94 4.92 5.89 4.93 4.90 5.89 8.00

Exchange rates

(Expressed in currency/euro)


Year-end exchange rates Average exchange rates

31-12-10 D% on
31-12-09 D% on
2010 D% on
2009 D% on
Mexican peso 16.5475 14.4 18.9222 1.6 16.7372 12.3 18.7988 (13.3)
U.S. dollar 1.3362 7.8 1.4406 (3.4) 1.3257 5.2 1.3948 5.4
Argentinean peso 5.4851 1.3 5.5571 (11.5) 5.2686 (0.1) 5.2649 (10.6)
Chilean peso 625.39 16.8 730.46 21.3 675.68 15.1 777.60 (1.9)
Colombian peso 2,557.54 15.0 2,941.18 6.3 2,518.89 18.2 2,976.19 (4.0)
Peruvian new sol 3.7528 10.9 4.1626 4.9 3.7448 11.9 4.1905 2.4
Venezuelan bolivar fuerte 5.7385 (46.1) 3.0934 (3.4) 5.6217 (46.7) 2.9950 5.4