Download Understanding Spanish financial crises, 1850-2000: What determined their severity?

Understanding Spanish Financial crises, 1850-2000: What
determined their severity?
Concha Betrán
Maria A. Pons
University of Valencia
Paper presented at the LSE Economic History Seminars,
London 1th October 2015
This is a very preliminary version. Please do not quote without author permission.
Comments are welcome.
1 Understanding Spanish Financial crises, 1850-2000: What determined
their severity?
1. Introduction
Although there are a lot of factors involved in financial crises, the depth and
macroeconomic impact have varied in history. Most of the crises are concerned with
changes in regulation, financial innovations, booms and bubbles of assets, bad practices,
scandals and corruption, and so on. There are also differences in the type of crises alike.
In general, the severity is higher when most than one type of crises occurred. Banking
crises accompanied by currency and stock market crises and even with sovereign default
tend to be more severe than one on their own (Reinhart and Rogoff, 2009). But even in
the case of these combinations, there are also differences in the magnitude and
exceptions. What could be the reasons of these differences in terms of severity?
Abundant amount of literature have been generated regarding the factors that
produce the current financial crisis with most recent debate focusing on the role of
current account imbalances and credit booms. The latter part of the twentieth and the
early part of the twenty-first centuries saw growing external imbalances that could be
the origin of the most recent financial crises (the 1997 Asian crisis and the 2007-09
financial crisis), but credit growth was also at the root of the 2007-09 crisis. Bernanke
(2005) pointed out that current account surpluses in a number of emerging countries
could have helped to fuel the credit booms in the major advanced countries (the “excess
saving” hypothesis). Borio and Disyatat (2011) on the other hand argue that the
performance of the international banking system led to excessive credit expansion. This
debate has also adopted a historical perspective, using a long database for a wide sample
of countries. While Bordo, Meissner and Stuckler (2010) and Bordo and Meissner
2 (2011) tend towards the external imbalance hypothesis, other papers such as Jordá,
Schularick and Taylor (2011a,b), Taylor (2012a,b) and Schularick and Taylor (2012)
argue that the key determinant of financial crises is credit growth. This paper
contributes to this general discussion by examining the experience of one particular
country: Spain.
The main difference between our paper and the existing empirical literature that
the latter uses cross-country analysis, whereas we study a single country. The
advantages of a single-country study are several. Firstly, it enables us to use the best
data available. Secondly, it avoids some of the cross-country study limitations,
particularly their inability to control for the characteristics of countries, such as:
institutions (including banking institutions), technology, factor endowments, etc.
Thirdly, it allows to take into account the timing of the crises, the existence of common
patterns in various crises and to perform an in-depth analysis in order to test empirical
hypotheses regarding the main determinants of the economic impact of financial crises.
For example, whether current account deficits are “good” or “bad” for an economy
depends on the origin and composition of them and this can only be examined with a
country-specific study. Lastly, we can see whether the general conclusions stemming
from cross-country analyses hold true for an individual country. Therefore, we consider
that cross-country results could be highlighted with case studies that incorporate the
country specific historical and institutional circumstances. Moreover, in this paper we
focus on the impact of financial crises on the economy. We not only consider whether
crises took place or not but the severity of them that could differ across countries and
time; accounting for this allow us to better detect the factors that concurred in the most
severe crises and comparing the Spanish case with other countries.
We study the financial crises that have occurred in Spain over the last 150 years.
3 Firstly, we determine the number of crises that took place between 1850 and 2000
considering currency, banking and stock market crises and all their possible
combinations and define their depth or severity. Spain is an interesting case study
because severity exhibits a different pattern than in other countries: the post-1973 crises
were more severe, with an average cumulative GDP loss of 14.3 (up to 25.97 per cent in
1976), an impact double than the world average and only surpassed by the 2008 crisis.
However, interwar crises, including the 1930 depression, were less severe in Spain by
4.12 per cent, a third lower impact than the world average (13.4 per cent) (Betrán,
Martín Aceña and Pons 2012). Secondly, we asked what are the main factors that
concurred in these crises to explain their different severity. We disentangle them
analysing some of the most important crises and we found that external imbalances
(current account) are associated with crisis intensity, a factor that also seems to be
behind the severity of the 2008 crisis (Ortega and Peñalosa 2012). We also analyse the
implications of current imbalances in terms of severity over time.
The paper is structured as follows. In Section 2, we define crisis severity and
present a narrative of the main Spanish financial crises to find empirical hypotheses
about the economic drivers of financial crisis severity. Section 3 offers the main
correlations and estimations that can explain crisis severity. We obtain that the higher
crisis severity is the higher previous large current account imbalance is and, however,
credit does not seem to be related to it. Given this result, in Section 4 we analyze why
current account imbalances may produce more severe crises and the main conclusions
are offered in Section 5.
4 2. What determined Spanish financial crises? A long run consideration
Apart from the current crisis that started in 2008, between 1850 and 2000 Spain
had to endure eighteen financial crises of diverse types and different depths and
durations (see Tables 1 and 2). How can we measure financial crisis depth? Most
financial literature uses a function of GDP growth. Normally, the depth or severity of a
crisis is considered the cumulative loss of output, namely output loss, estimated by
summing the differences between trend growth before the crisis and output growth until
the time when annual output growth has returned to its pre-crisis trend. Trend growth is
estimated using the average growth for periods delimited by two peak years (Prados
2003). Recovery time or duration is defined as the number of years until GDP growth
returns to its pre-crisis trend. By definition, the minimum recovery time is one year.
According to our estimates, using the output loss measure (see Table 2), in Spain
the most severe was the 1976 crisis (with a 25.97 per cent), only overtaken by the 2008
crisis. The period 1973-2000 was the worst, with an output loss of 14.3, which contrasts
with the results for the world average obtained by Bordo et al (2001) where the interwar
period and the 1929-31 crisis were the deepest. However, in Spain the 1929 Great
Depression had a relatively lower impact than in other countries1, and a similar output
loss than other nineteenth century crises such as the 1882 crisis (around 13 per cent).
The ranking (in brackets) of Spanish crises in terms of the largest output loss is as
follows: 1866 (5), 1882 (3), 1931 (4), 1976 (1) and 1982 (2), triple crises being recorded
in 1882, 1931 and 1976. Although 11 of these total 18 financial crises coincided with
international ones (1866, 1874, 1882, 1892, 1914, 1921, 1931, 1976, 1982, 1991 and
1995) (see Table 2), as we have commented, our estimates show that the ranking in
terms of severity is different than in other countries.
5 What distinguishes our work is that in addition to considering all types of crises1
(not only currency and banking but also stock market crises and their possible
combinations), we also identify other crises that are not included in the cross-country
studies. Table 1 shows that our accounting is different as those obtained by the main
database used by Bordo et al (2001), Jordá et al (2011b) and Reinhart and Rogoff
(2010). With a more detailed study, we obtain the following results. Firstly, our longterm analysis starts in 1850 and consequently we include the 1855 and 1866 crises.
Secondly, it identifies certain crises that are not in the cross-country studies (1874,
1899, 1905, 1943 and 1948), some of them very severe (mainly the 1866 and 1874
crises) and widely discussed in the Spanish literature.
1850-1913
In the nineteenth century the frequency of the financial crises in Spain was much
higher than in the world (1850-1913: 11.1 in Spain and 4.9 for the world according to
Bordo et al 2001). Crises were severe (it is the second period with more severe crises
after 1973-2000) but less than the world average (8 for Spain and 9.8 for the world).
The 1866 Spanish crisis is quite representative of the nineteenth century crises and it
coincided with the 1866 Overend Gurney international crisis, one of the most relevant
episodes of financial distress in Europe in this period (Table 2). After the 1854 liberal
revolution in Spain, there was an institutional change to promote economic growth that
was accompanied with several new laws and reforms such as the Disentailment Act of
privatization of land belonged to the Catholic Church and religious orders and
communal land owned by municipalities in 1855, the Railway Law in 1855 and the
Bank of Issue Law and the Credit Company Law in 1856. Railway construction was fed
1
In some cases, allocating a specific year to a crisis could be difficult because for multiple
crises we have chosen a year as a representative of the different crises. For this reason, for
example, we identify a triple crisis in 1976 and Bordo et al (2001) a currency crisis in 1976 and
a banking crisis in 1977. 6 by foreign capital entries, but also by the numerous benefits and government subsidies
to this industry and for the facilities that the 1855 Law gave to import all construction
material and fuels free of taxes for ten years. Foreign capital supposed for the period
1860-1870 an average of around 15 per cent of total investment (Table 3) and around
50-60 per cent of total railway investment2 (Tortella 1994). Foreign capital entries
increased money and the Bank of Spain reduced the interest rate, a situation considered
for the contemporaneous as exceptional (Pastor 1866)3. This coincided with an
economic expansion and booming which has been seen as the start of capitalism and
industrialization in Spain.
The railways construction was very rapid and based on imports4 (Tortella 1973,
Nadal 1975, Gomez Mendoza 1998). The lack of a developed iron and metal industry
was a serious bottleneck and limited the possibility of supplying the railways industry
with national production. Trade deficit stood at 2.5 per cent of GDP in the period 18621866, having a similar impact in terms of trade deficit to the loss of the Spanish colonies
in the 1820s (Carreras and Tafunell 2003). Guell y Ferrer (1869), a Catalan economist
and industrialist, considered that the increase in imports produced a huge trade deficit
that jointly with the public deficit covered by foreign debts generated high current
account imbalances that determined the severity of the 1866 crisis.
In addition to foreign capital entries and external imbalances, the 1866 crisis was
also related to financial expansion. The Bank of Issue Law and the Credit Company
2
French and Belgium investors such as Péreire, Rothschild and Prost and Guilhou came to
Spain, and these investment groups were related to the Bourse of Paris.
3
Luis Pastor (1866) was ex-Minister of Treasury during the crisis.
4
In 1875/79 railways materials represented around 3.6 per cent of total imports (Prados 1988),
but other sectors were also affected by the railways expansion such as coal, iron and steel, wood
and machinery (all of them representing the 13 per cent of total imports) and it is impossible to
separate the increase in imports that was linked to the railways and to other sectors. 7 Law approved in 1856 established a relatively open and liberal financial framework5.
The result was that between 1856 and 1866 35 credit institutions were created and the
number of issuing banks grew from 3 to 20 (Tortella 1994). Banks and credit societies
invested on the railways sector and these financial institutions implemented high-risk
financial innovations6 which foster expansion of credit and fiduciary money (Navas and
Sudria 2007, Sudria 2014).
As Broder (2000) argues, the years previous to the 1866 international crisis were
very unstable7 and the Bank of England increased the interest rate to avoid the flight of
capital from 4 to 9 per cent from October 1863 to October 1864; similar measures
adopted the Bank of France and also the Bank of Spain. In this negative context, the
heavy losses suffered by most railway firms in Spain8 precipitated the stock market
crash on the Paris Stock Exchange and a sudden reduction in capital inflows in 1864
that worsened in 1866 as a consequence of the failure of the bank Overend, Gurney and
Co in London (Tedde 2010). The stock market crash mainly affected to credit societies
that were very involve in the railways business.
Moreover, the Spanish government started facing serious financial difficulties.
The government obtained financial funds thanks to the sale of disentailed land in public
auction, but when the money was expended the public deficits come back and the
government had to finance by domestic public debt and loans from the Bank of Spain.
5
This regulation was linked to the liberal ideology of the period but also to the need to promote
the development of the Spanish financial system (Tortella 1973, Tedde 1974, Martín Aceña,
Pons and Betrán 2014). 6
The main financial innovation was that credit societies could issue bonds with term maturity
between 30 days and a year and these short term bonds circulated as banknotes and contributed
to the Spanish monetary expansion (Tortella 1973, Navas and Sudrià 2007).
7
Instability was related to the depressive effects of the end of the American civil war, the
British industry problems due to the lack of cotton imports and the scarce vitality of the
international Stock Market (Broder 2000).
8
As Luis Pastor (1866), who was Ministry of Finance in the 1850s, mentioned: “railroads built
did not produce high enough yields to pay interest, not only to the shareholders but also to the
bondholders; and lack capital to finance future railroad constructions”.
8 The international crisis impeded the possibility of continuing with the sale of public
bonds in the foreign markets9. The loans given to the Spanish government by the Bank
of Spain, the banking expansion and some financial practices10 which stimulated credit
and fiduciary money growth distressed financial stability and produced a scarcity of
metal which began in 1863. The Bank of Spain (1877) justified this situation arguing
that they issued the money following the law, and that the lack of metallic money was
due to metal scarcity and the negative of the government to import gold and silver.
When the crisis arrived, the government authorized the metal imports but the argent
price increased so much that it could not afford it (Bank of Spain 1877). This situation
affected the Bank of Spain that could not commit the payment of issues and there was a
bank panic. The Compañia General de Crédito was the first credit society that was
liquidated in 1864, followed by the Banco de Valladolid but at the end of the crisis the
40 per cent of the Spanish banks were officially liquidated and this supposed the first
restructuration of the Spanish financial system, only similar in proportion to that
happened in the 1970s.
The rest of the nineteenth century crises (1874, 1882, 1892, 1899) shared most
of the mentioned characteristics of the 1866 crisis: a boom in the railways and also in
the mining sector, strong foreign capital entries mainly to these two sectors, huge
speculative investments that fuelled bubbles, a process of financial expansion, a
growing deterioration in public deficit, current account imbalances and a sudden
reduction in capital inflows the years previous to the crises. Globalisation was also
behind the economic difficulties of the last third of the nineteenth century and, in
9
Foreign debt represented around 15-17 per cent of total public debt in the mid-1860s.
10
This was the opinion of the senator Vázquez Queipo in 1866: How does the government
return to the shareholders the capital taken out dishonestly by the director or the cashier of credit
society? How can one avoid that a railway that fraudulently squandered double its budget, yield
a meagre if not non existent return for its shareholders? And finally, how does one return to the
market the wasted capital lost through fraud or recklessness.
9 particular, the agrarian crisis produced as a consequence of the impact of cheap grain in
the European periphery (Llopis and Maluquer 2013).
In this period speculative investments and foreign capital entries (mainly French
and British investors) were linked not only to railways but also to mining that
experience a boom thanks to a change in legislation in 1868, and to the public deficit
problems that finished in the disentailment of the Riotinto mines in 1873 (Pérez de
Perceval 2012). As Harley and Taylor (1987) mention, from 1876 to 1900 Spain was at
the forefront of the lead and cooper world industries with the 23.5 per cent of the
world's lead production and 16.8 per cent of copper. Spain also produced more than 86
per cent of the iron ore, 90 per cent of the sulphur sold abroad by European countries
and 40 per cent of world mercury output (Escudero 1996). But mining was a risky
business, with not very high profits (with the exception of some leading firms) and most
firms failed, especially those registered after 1890 (Harley and Taylor1987).
As said, booms, speculation and growing difficulties in the public sector were
behind the main nineteenth century crises. The 1874 crisis was purely a stock market
crisis that erupted a year after the international crisis of 1873 (the German and Austrian
stock market collapse associated with the Franco-Prussian War, 1870-1871). In Spain
the 1874 crisis was related with the scarcity of money and the reduction of prices but
mainly with the public deficit problems (Martinez Gutierrez 1874, Mansó y González
1874) and the huge amount of outstanding public debt11 that generated a debt crisis that
led to a default on debt interest payments (Comín 2012). The international crisis made it
increasingly difficult for Spain to obtain credit in the foreign markets and 1874 was the
first year in which Spain registered a deficit in foreign capital inflows (Prados 2010).
11
The ratio public debt to GDP increased enormously from 71.20 per cent in 1866 to 154.83 per
cent in 1875, and the foreign debt to GDP ratio from 15.98 per cent to 51.43 per cent in the
same period.
10 Behind the 1882 “triple” crisis was the so-called "febre d´or" (gold fever in
Catalan), a market bubble that affected all stocks in the Barcelona stock exchange (and
later on in Madrid) and that coincided with a construction boom in South-eastern
Europe that fuelled a stock market bubble in France12. The bubble crash caused a
banking crisis (as a consequence of withdrawals and the large industrial portfolios of the
Spanish banks) and between 1882 and 1884, twenty banks disappeared, most of them
from Barcelona. The Spanish economic situation also deteriorated when in 1881 the
government decreed a massive conversion of public debt (the Camacho restructuring)
that resulted in a massive capital flight and a strong sudden stop (Prados 2010a). Gold
flowed out and the Bank of Spain, faced with large reserve losses, was forced to
suspend gold convertibility in 1883 (Martín Aceña 1994). Despite of this, exchange rate
practices were like that of the countries in the gold standard system, although without
the same pressure (Bordo and James 2013).
As Figure 1 shows, all nineteenth century Spanish financial crises were preceded
by sudden reversals of capital inflows in which country creditors either hit by domestic
shocks (the German and Austrian collapse in 1873, or the Baring crisis in 1890-91or
fearful of events in the borrowing countries, for example, the 1881 debt restructuring or
the affidavit in 189813) turn off the lending capital. In addition to current account
imbalances and sudden stops, in some nineteenth century financial crises were also
linked to a credit expansion in the years previous to the crisis (for example, in 1866 and
1882 real credit growth increased in the three years previous to the crisis). However, we
only have credit data for the credit societies and not for private individual bankers and
12
In Barcelona the stock market bubble was also encouraged by other factors such a credit
expansion and an economic boom associated with the increase in the wine demand as a
consequence of the French phylloxera plague (Catalan and Sánchez 2013).
13
Only foreign bondholders would have their interest payments guaranteed in gold, whereas
Spanish bondholders would be paid in current pesetas or would have the opportunity to convert
external securities into domestic debt.
11 banking houses that would have been important at that time, and moreover the impact of
credit growth could be smoothened by the small size of the Spanish financial system:
the ratio Financial assets on GDP in Spain had an average of 0.2 per cent between 18751900 whereas the average for 14 countries in the same period was around 0.7 per cent
(Schularik and Taylor 2012).
1914-1936
From 1914 to 1936 there were four financial crises (1914, 1921, 1924 and 1931).
With the exception of the 1931 crisis, the rest were not very severe. As in the nineteenth
century, in this period crises were more frequent but less severe than in the world
average (Betrán, Martín Aceña and Pons 2012). The origin of the 1914 crisis was the
financial instability with the onset of the First World War which affected stock markets
and produced bank panics, currency crisis and so on. In Spain also happened a stock
market and a bank crisis14 in 1914. The situation was especially hard in Bilbao and
Barcelona but the Bank of Spain helped the banks with difficulties through discount and
loans (Martín Aceña 2013).
The low severity of the post - IWW crises (1914, 1921 and 1924) crisis could be
related to the neutrality of Spain and the positive trade balance. The huge positive trade
balance allowed paying debt, assets and bonds in foreign hands both public and private
(Sardá 1948). There are no current account data from 1914 to 1931, but according to
Sudria´s estimates (1990) the current account surplus during war times was used in the
repatriation of foreign public debt, the acquisition of Spanish private assets abroad, the
sale of gold to the Bank of Spain and stocking foreign currencies. In the case of foreign
public debt, an amount of 500 millions of current pesetas were expatriated and bought
14
The crisis only affected a bank, Crédito de la Unión Minera, which had a suspension of
payments but was recuperated by a loan from the Bank of Spain. In 1913 the Banco Hispano
Americano, which the 11 per cent of total Spanish banking assets, also had problems due to its
business with the Mexican economy and the instability of this country at that time (MartínAceña 2013).
12 by Spanish citizens; in some cases it was converted in domestic debt. The Spanish
government promoted these purchases. As a result, foreign public debt, that as
mentioned was very high in the nineteenth century, disappeared. The private assets
acquired were mainly railways assets and bonds in an amount of 900 millions of current
pesetas. Gold reserves in the Bank of Spain increased in 1,829 million of current
pesetas15. The rest of the balance of payments were foreign currencies (francs, marks
and liras), estimated in 1,250 millions of current pesetas, but as a consequence of the
huge depreciation of these currencies after the First World War and the non recovery of
their values, they were mainly lost.
The strong capital accumulation in the hands of entrepreneurs and speculators
during the war-years stimulated banking expansion, although this occurred with no kind
of specialisation, with very low capital and unprofessional managers and without the
supervision and intervention of the Bank of Spain to prevent banking problems (Masso
Escofet 1921). When the war finished and prices fell in 1920, banks continued
increasing loans and credits for speculation. However, portfolio values declined because
public and private assets deteriorated (Masso Escofet 1921). In 1921 a stock market
crisis and a panic bank followed, mainly in Catalonia. Those banks involved in
speculative operations had serious problems. Royes (1999) shows how the Banco de
Terrasa speculated with foreign currencies (mainly deutsche marks) and had a risky and
uncontrolled credit policy. The situation was similar in the Banco de Barcelona (Cabana
2007) that had a suspension of payments in 1920. The main consequence of this
banking crisis was a change in regulation (Banking Supervision Law of 1921)
establishing a higher control over the banking system and the declaration of giving to
the Bank of Spain the function of a central bank in the sense of being the lender of last
15
The 40 per cent of gold was stocked in the Bank of Spain and used by the Government in
1936 to finance the Civil War.
13 resort; but regulation did not allow to avoid the banking crisis that emerge in 1924 when
the Banco Central was near bankruptcy and had to be rescued16, and others failed and
were liquidated. With the exception of the Banco Central, the Bank of Spain decided to
only provide a very limited lender-of-last-resort assistance helping those banks with
temporary liquidity restrictions and at the end only a bank, the Credito de la Unión
Minera, had a suspension of payments in 1924 (Martín Aceña 2013).
The increase in gold reserves in the Bank of Spain during the 1920s made that
the Spanish Government assessed the possibility of joining the gold standard (Comisión
del Patrón Oro 1929) but tensions in the international markets, which started in 1928,
would not allow it. The peseta never could belong to the gold standard system before
and after 1931 crisis, when the sterling pound abandoned it.
To sum up, the 1914, 1921 and 1924 crises took place after a period of rapid
economic growth linked to the First World War. These crises had a very small impact
(zero in terms of output loss in the case of the 1921 and 1924 crises). By contrast with
other periods, during the First World War years there was a surplus in the trade balance
and a great accumulation of reserves from 1914 to 1919 (and consequently an expected
positive current account balance). It may be argue that the likely small external
imbalances could explain the low severity of these crises. And these crises had a low
impact despite the fact that the 1921 and the 1924 crises were preceded by a rapid
financial and credit expansion, especially from 1917 to 1922 when the average annual
rate of credit growth was above 23 per cent.
The deepest crisis in this period took place in 1931. Although the Great
Depression was less severe in Spain than elsewhere in Europe, a perception that already
16
The Banco Central, one of the biggest and most influential institutions, had serious problems
that threatened to shatter the whole financial structure.
14 had the contemporaneous17, it was the most profound financial crisis from 1914 to 1936.
It was a triple crisis and it erupted after a period of economic growth in the 1920s linked
to the dynamism of some sectors related to the technologies of the Second industrial
revolution, although the country was still predominately agrarian. In 1929 the US stock
market crash dragged down the European and consequently the Spanish stock market,
which index decreased around 65 per cent from 1928 to 1934. Moreover, the
turbulences of the international monetary system contributed to the strong
depreciation of the peseta (of around 38% in current pesetas and 54% in gold-pesetas
according to Carreras and Tafunell (2003)) and capital outflows (Tortella and Palafox
1984, Palafox 1991).
The foreign contagion was not the only cause of the 1931 triple crisis. In
addition to the external shock, Spain experienced serious internal problems that lead to
a crisis. The 1931 crisis coincided with the fall of the Monarchy and the proclamation
of the Second Republic, and this political change generated political instability and
depressed business expectations. In parallel, there was a rise in wages in the agriculture
and the industrial sector that improved the purchasing power of labourers and
consequently consumption, but reduced business profits. The increase in social and
labour disruptions in addition to profit reductions during the Second republic fuelled the
lack of confidence of entrepreneurs and there was an important fall in investment. This
depressive trend derived in an economic recession that generated banking difficulties
and capital outflows from 1928 (Ventosa and Calvell 1932). The ratio
deposits/currency, that is used to measure the panics or deposits withdrawals, decreased
23 per cent between 1930 and 1931, but deposits increased again from 1931; as Figure 2
shows, from 1929 to 1933 the ratio only decreased around 9 per cent in contrast to the
17
The contemporaries’ made this assessment, see Servicio de Estudios del Banco de España
(1934).
15 53 per cent of deposit withdrawals in the US between 1929 and 193318. The final result
was that seven banks disappeared (three in 1930 and four between 1934-1935), a very
small banking crisis in comparison to other countries. The banking crisis mainly
affected the Banco de Cataluña, Banco de Reus and Banco de Tortosa. With the
exception of the Banco de Cataluña, which had the 25 per cent of deposits in Catalonia,
the rest were small banks and therefore, the banking crisis did not had a big
repercussion on the Spanish financial structure.
The Spanish banking crisis was not severe for several reasons. Firstly, banks
were able to obtain all the cash they needed to convert deposits into currency. The Bank
of Spain behaved as a lender of last resort. When the run started, the government
authorized an increase in the limit of banknotes in circulation, and the Bank of Spain
agreed to discount bills on demand and accept unhesitatingly eligible paper as collateral
for credit. Since the crisis coincided with a flight from the peseta, the government also
authorized a rise in interest rates to stop the outflow of capital. Moreover, banks had
plenty of liquid assets. The Spanish banks were loaded with gilt-edged securities and
they pledged their unused portion of government paper to obtain cash; therefore, public
securities acted as an automatic built-in stabilizer (Martín Aceña, Pons and Betrán
2014). Secondly, the US banking crisis affected international banks because they
required the repayment of loans, but Spanish banks had not external indebtedness at that
moment.
The lower severity of the 1931 Spanish crisis could also be linked with the
strong depreciation of the peseta from 1929. In the first years of the 1920s the peseta
floated around official parity (established in 1868), but from 1927 its value dropped and
in 1931, when there was the political change in Spain from Monarchy to republic, the
18
Data for the US from the Federal Reserve Bank of St. Louis, Economic Data.
16 fall was around 50 per cent (Sardá 1948). Initially the Bank of Spain denied the use of
gold reserves to stabilize the exchange rate (Martinez Mendez 2005), but later on there
were some attempts to control and intervene to guarantee the peseta value (Martinez
Ruiz y Nogues 2013). Despite of this, the peseta followed its depreciating trend until
1932. The depreciation had positive consequences for Spain. As Eichengreen (1992)
pointed out, those countries that earlier abandoned the gold standard had a faster
recovery than those that maintained on the gold standard because them (including
Spain) were not subject to the restrictive policies to maintain the gold parity. The
depreciation of the peseta allowed for improving external competitiveness reducing
current account imbalances and avoiding international deflation. Data shows that Spain
experienced trade deficits during the 1920s (Table 4), but from 1931 to 1934 trade
deficit decreased and even there was a surplus in 1934. The main channel of
transmission of the international crisis was the fall in exports (linked to the contraction
of the international demand and the increase in protectionism), but in relative terms the
Spanish fall was lower than in other countries thanks to the peseta depreciation.
Moreover, Spain was less trade integrated than other countries and consequently this
fact smoothly the impact of external shocks on the economy19. The international crisis
likely may reduce foreign investments and emigrants’ remittances, as a consequence of
the return of emigrants to Spain, and this may affect the current account balance, but the
current account data for the years 1931-1934 show a small deficit and even a surplus in
1934. In this sense, despite lack of data from 1914 to 1930, it could be expected that in
the years previous to the 1931 crisis there were current account imbalances in Spain
(linked to the trade deficits) but not very acute and consequently that could influence the
19
The average of the openness rate for Western Europe in the 1920s was around 40 per cent and
the ratio decreased to around 20 per cent in the firsts 1930s (Carreras and Tafunell 2003). For
Spain the ratio was around 24 per cent in the early 1920s and it decreased below the 15 per cent
in the 1930s (Tena 2005).
17 lower intensity. However, as in the 1920s, the 1931 crisis happened in a context of
financial expansion, with an average growth of real credit from 1926 to 1929 above the
10 per cent and an increase in the ratio Financial Assets institutions on GDP from 90.8
in 1920 to 128.3 in 1929 (Martin Aceña and Pons 2005).
1940-2000
As in the rest of the world, from 1940 to 1972 the number of crisis in Spain was
low. According to Bordo et al (2001), regulation of domestic and international markets
suppressed banking crises and capital flows controls reduced currency crises. In Spain
there were no banking crises. Banks and saving banks in difficulties were systematically
rescued by the Bank of Spain and mergers and acquisitions of banks in trouble by sound
banks was the other alternative used to avoid bankruptcies (Pons 2002). The two crises
of the 1940s (1943 and 1948) were currency and stock market respectively and were not
deep. The most severe was the 1958 crisis, being inflation, monetary instability and
external imbalances (especially from 1955 to 1957), with a very sharp fall in foreign
exchange reserves, behind this crisis. These economic difficulties were related to the
inward oriented economic growth during the 1940s and 1950s. The recovery of the
domestic demand after the depression of the post-civil war years and the demands of
new industries pressured imports and consequently trade imbalances increased in the
second half of the 1950s. Growing inflation was a product of an accumulation of
problems such as increasing public deficits and debt monetization (García Delgado
1987). The seriousness of these difficulties ended with the establishment of the 1959
Stabilization Plan with the support of the IMF.
Between 1973 and 2000 Spain suffered four financial crises, the most severe
being that of 1976 (25.97 per cent) followed by the one in 1982 (23.62 per cent). The
other two crises, both much less intense, occurred in 1991 (6.25 per cent) and 1995
18 (1.48 per cent). By international standards the severity of the financial crises in the
period (1973-2000) was higher (14.3) than in the world (8.3). Thus, by contrast with the
Bordo et al (2001) results, post-1973 crises in Spain have not only been more frequent
but also more severe. As Bordo et al (2001) point out, recessions with crises are more
severe than recessions alone, and in Spain the 1976 crisis did indeed coincide with an
economic recession. External imbalances were behind the 1976 crisis. From the end of
the1950s Spain moved gradually to an open economy and in the late 1960s and the
beginning of the 1970s the openness ratio was around 26 per cent, very similar than the
average for the World (29 per cent) and not very far from countries like Italy (31.35 per
cent) or France (31.32 per cent) (Roser 2015). This higher integration coincided with a
deterioration of the trade deficit during the 1960s, especially in the second half.
Economic growth was mainly based on domestic demand and Spanish economic
exports remained weak. By contrast, the capital imports needed for a rapid expansion of
infrastructure and industry due to industrialization increased. The result was that Spain
experienced a trade deficit on GDP ratio of around -5.55 per cent between 1965 and
1973. As Figure 2 shows, during the 1960s high trade deficits were easily covered by
the surplus in the services and transfers balances thanks to the tourism revenues and the
migrant remittances. The result was that the current account deficit was relatively low
(not above 2.2 per cent on the GDP) and even positive in the first 1970s (Lieberman
1995).
The situation changed with the oil crisis. Between 1973 and 1975 oil prices
doubled and there was a deterioration of the Spanish current account balance that passed
from a positive balance from 1970 to 1973 to a strong deficit from 1974 to 1977 (see
Figure 3). At this moment the oil imports represented around 2/3 of total energy
consumption and as a consequence of the rise in oil prices Spain paid 2.500 millions
19 dollars and the trade deficit increase around 50%. The second oil shock in 1979
worsened the situation. From this moment, Spanish current account deficits were mainly
the result of foreign trade deficit and had a close relationship with oil imports.
Moreover, trade deficits were not covered by the tourism revenues and the migrant
remittances as it was in the past; as a consequence of the international crisis there was a
decline in tourism of 30 per cent and also in migrant remittances of around 20 per cent.
Initially the government tried to intervene to smooth the impact of the oil crisis with
price intervention and the result was that in Spain the international crisis came later than
to the rest of the world (Betrán, Cubel, Pons and Sanchis 2010). But the lack of strong
adjustment policy and increased public spending led to public deficit, which grew even
more as a consequence of other spending related to the crisis and a fall in tax revenues.
Notwithstanding, in addition to rising oil prices, increasing labour costs
produced a serious cost-pushed inflation. The industrial sector was severely hit as a
consequence of an increase in costs at a time of falling demand. Technical
obsolescence, lack of competitiveness, a low level of self-financing and a high
dependability on credit put industrial companies and banks in a precarious situation and
many firms were unable to survive. The economic recession damaged the quality of
banking assets and the ratio Non- performing-loans-to-Total loans increased from 1.1 in
1973 to 3.3 in 1981 and 5.40 in 1984 (Boletín Estadístico del Banco de España, several
years). Therefore, the transmission mechanism of the crisis was from the industrial to
the banking sector through an increase number of failures in the industrial firms and
unpaid clients and the crisis was aggravated by a stock market crash that strong
deteriorated the Spanish banks balance sheet that had large industrial portfolios (Cuervo
1988).
20 In the build-up of the 1976 and 1982 crises was also the process of economic
liberalization and deregulation of the financial sector that started at the mid-1970s.
During the 1960s and early 1970s, the Spanish financial system was highly intervened
in terms of barriers to entry, interest rate controls, etc, but during the mid-1970s the
liberalisation process received a major impulse and it was accompanied by a great
financial expansion. The main problem was that financial institutions were not used to
operate in a competitive environment and they tried to compete by gaining market
share. Many banks expanded into geographical and business areas increasing their
operations costs. Moreover, the liberalization process was not accompanied by
appropriate prudential regulation and supervision (Poveda 2012). Finally, the banking
and credit expansion during the 1970s was also accompanied by bank mismanagement,
with a large number of risky, speculative and even illegal banking practises (Cuervo
1988).
The 1976 crisis was a triple financial crisis, but it was primarily a banking one.
Fifty-six banks out of one hundred and ten, representing 20 per cent of banking system
deposits experienced solvency problems. Due to the depth of the crisis and the number
of institutions affected by it, this crisis was categorized as one of the so-called recent
“Big Five Crises” by Caprio et al (2005) and Reinhart and Rogoff (2009). The final
balance of the banking crisis was: 29 intervened banks, 7 mergers, 4 liquidations and 20
small and medium banks were nationalised. Although the crisis started in the small and
young banks (90 per cent of the banks that were involved in the crisis had been born
between 1973 and 1978), finally in 1982/1983 it affected to Rumasa, a large industrial
holding company with 20 banks that also failed and were nationalised by the
government and to the Banco Urquijo, an industrial bank that was among the eight
biggest banks in Spain (Caruana 2009). The final result of the crisis was a banking
21 restructuring that resulted in an increase in concentration (because the largest banks
purchased the banks with problems) and a strengthening of the regulatory framework.
A currency crisis was then added into the equation. Growing inflation reduced
external competitiveness and the peseta was devalued to adjust to its market value.
From 1974 to 1985 the exchange rate decreased from 58 pesetas/dollar to 160
pesetas/dollar. As the triple crisis coincided with a recession, the impact in terms of
output losses was very high and it was followed by a new currency crisis in 1982 that
also had a great impact. The 1982 crisis could be said to stem from the 1976 crisis. As
in the 1976 crises, there was a current account deterioration three years before the crisis
(see Figure 2) but also an increase in credit growth linked to economic expansion, with
annual rates of around 20 per cent the years previous to the crisis; in fact with the
exception of the period (1976-1979), credit grew at high rates from the late 1960s in a
financial system that expanded and changed from a ratio Financial Assets to GDP of
around 1.5 in 1968 to 2.26 in 1977. Therefore, the post-1973 crises were accompanied
by current account deterioration as the result of high trade deficits the years previous to
the crises; in this period, they were also preceded by credit expansion.
In short, in the study of the main drivers of the Spanish financial crises in history
we comprehend that current imbalances seem to be behind the biggest crises in terms of
output loss or macroeconomic impact, such as nineteenth century crises and 1976 and
onwards crises. However, credit expansion was not important until the twentieth century
financial crises, and moreover with different consequences in the 1931 and 1976 crises.
This lack of significance of credit expansion could be related to the relative
backwardness and small size of the Spanish financial system during most of the period;
for this reason, only from the 1970s, when the economy had a higher degree of
financialisation, there may be a relationship between financial crises severity and credit
22 expansion. Therefore, the current account hypothesis appears as the more related to a
greater crisis severity.
4. Empirical findings: main estimations
In this section we estimate the relationship between crisis severity and current
account deficits. We test whether there is empirical evidence to support that current
account deficits are behind the higher crisis severity. We try to estimate if current
account matters controlling for other variables that could also affect crisis depth. The
main flaw to achieve this objective is that we only have 18 crises, which is a limited
number of observations, and furthermore we have no data for the current account
variable for all the years.
We estimate the following regression equation using OLS:
Yi= ∅ Xi + εi
Yi being the variable which measures crisis severity, Xi the pre-crisis variables
influencing severity and εi the residual.
Our strategy, given the few observations we have, is to firstly estimate the
relationship between the explanatory variable, current account balance, and the
dependent variable, using the level of real GDP at the onset of the crisis as a control.
This control allows us to capture the differences in the level of development over the
150 years of crises. Secondly, we will perform a multivariate estimation to ascertain
their robustness and explanatory power when considered credit growth jointly. We will
follow other checks for the robustness of the estimations such as: the interactions
between current account balance and credit growth to see whether these variables go
hand in hand in explaining severity, adding other additional economic control variables,
23 and finally estimating its impact using a growth regression which allow us controlling
for the factors of production.
We have considered two measures of crisis severity or intensity. The first one is
the output loss, as explained above, the accumulative output loss of GDP summing the
difference between the real output growth and the potential trend growth until the time
when annual output growth recovers its trend The other measure is GDP per capita
growth, which is the average growth during the years of duration of each crisis. The
explanatory variables are averages of the variables during the length of the crisis to
maintain consistency with the definition of output loss and GDP growth20. The
differences between output loss and GDP per capita variable is that output loss
measures the losses cumulated during the crisis and per capita GDP growth is an
average during the crisis years calculated annually.
By construction, the variable output loss measures the difference between actual
growth and potential growth. Therefore, when it is positive (negative), there is positive
(negative) economic growth or growth above (below) the trend. We can follow the
results of the regressions for the dependent variable output loss in Table 5 and per capita
GDP growth in Table 6 respectively. The current account balance variable has the
expected positive sign and is statistically significant in a majority of regressions21.
However the credit growth variable is not significant. We have tested with the
variables credit growth and credit to GDP growth with 3 and 5 lags and we obtained the
same result (we show the results with the credit growth lagged 5 years in regression 2,
20
Table 2 displays the output loss for the Spanish financial crises and that for 1921, 1924 and
1943 was zero. That means that for these three crises there was not output loss. However, as the
difference between the real output growth and the previous trend growth was positive for these
crises, in the estimation for being consistent with the GDP growth measure that takes negative
(positive) values when there is a decrease (increase) in GDP, we consider that the output loss
with the positive values of 1.22 for 1924, 1.57 for 1924 and 3.02 for 1943.
21
We consider this variable with 3 lags in the regression shown, but we have also checked with
5 lags obtaining similar results.
24 in both Tables). We would have expected that easy access to credit, for example by
innovative financial instruments, would have allowed for overinvestment in some
activities and hence, the creation of bubbles and also a misallocation of resources,
which, when the cycle disappeared, would produce a reduction in growth or a crisis.
Given this result, we also considered the possible interaction between current account
balance and credit growth, to see whether the external flow of capital could feed credit
growth. The credit growth variable continues to be not significant. We obtain it in the
regressions 3 in Table 5 and 6, using both dependent variables, that on the contrary the
significance of the current account variable and its coefficient increase. That means that
part of the credit growth produced an increase in current account imbalances that might
affect the severity of the crises. Therefore, credit growth could favour external
imbalances because credit could be used to raise imports or increase foreign
indebtedness growing external imbalances (such was the case in the nineteenth century
when most of the material used in the railways’ construction was imported as we have
explained in the previous section).
We use other control variables: a dummy variable for the crises which coincided
with a period of capital globalisation (1880-1913 and 1971-2000), the relevance of the
foreign public debt on GDP due to its impact on the nineteenth century crises, and a
measure of extra-growth, the average growth for the three years prior to the crisis in
relation to the trend growth of those years, considering that economic growth could
produce an internal imbalance in the economy implying macroeconomic bubbles (see
for example Martin and Ventura 2012’s paper for a model in which over growth is
driven by a bubble and a survey of papers related to it). Capital globalisation has a
negative effect on crises severity although is only significant with the GDP per capita
growth dependent variable. The relationship between foreign public debt and crisis
25 severity is negative but not significant in both dependent variables alike. Moreover, the
higher past GDP growth in relation to trend growth is associated with larger GDP per
capita drops during crises. Therefore, the result is that the current account variable is the
only one greatly associated with crisis intensity.
We are going to check the robustness of the results obtained in the regressions
considering growth regressions over the time period. Being the dependent variable, the
per capita GDP growth and as explanatory variables the main production factors that
explained economic growth, hence controlling for Investment/GDP and Human capital,
and the variables we are interested. The estimated regressions are:
Growtht = α0 + α1 Investment/GDPt + α2 Human Capitalt + α3 Crisist + α4 ln GDP
per capita0 + α5 Xit + εt
All the variables are average of non-overlapping five-year periods, being as a
period t. Growtht is the average annual growth of real per capita GDP, Investment/GDPt
is the average of the Gross Fixed Capital Formation to GDP ratio, Human Capitalt is the
average of an index which takes value 100 in 1850, and ln GDP per capita is at the
initial year of each period. In keeping with Bordo, Meissner and Stuckler (2010), we
have included the variable Crisis which is the average years of financial crisis and it is
the average of the sum of dummies in which the country experienced a crisis. The
capital globalisation dummies are also included. Xit is the average of the explanatory
variables considered potential determinants of crisis severity, such as current
account/GDP, credit growth, the interaction between both former variables, and foreign
public debt/GDP and εt is an error term for the five-year period22.
22
In this case we are taking into account growth every 5 years, not only during crises, such as in
the previous regressions. Although we control for the years in which crises happened, this could
affect the results underestimating the impact of current account balance on crises severity. The
relationship between the current account variable and economic growth could be ambiguous,
positive or negative depending on the source of the economic growth. The current account
26 The results appear in Table 7. The variables related to growth regressions are all
significant, especially Investment/GDP, and with the expected sign as we can see in
regression 1. Current account balance surplus has a positive and significant effect on
growth. Financial crisis decreases growth, although is not significant, but the
coincidence with a financial crisis would produce a reduction in economic growth of
around 0.05 or 5%. This means that if the average growth of the whole period is 1.6%, it
is equivalent to a loss of around 3 years of economic growth.
Credit growth again does not have any relationship with growth. We have also
interacted credit growth and current account and these do not lead to any upgrading in
the regression (column 3)23. Even when we add the additional control variables
considered, whether the exposure to foreign currency (hard currency debt) had a
stronger effect, we find no relationship and the significance of the current account
variable increased. Therefore, current account balance is the most robust variable
associated with lower crisis severity.
This paper is not about the origins and causes of crises but the reasons for the
incidence of crises, and we find that current account is the variable more highly
associated with crisis intensity. Meanwhile, credit growth is not related to the two
different measures of crisis severity we have used. Moreover, when we estimated the
robustness of the result, the only variable that holds a higher significance is current
account. This result is maintained when controlled for the factors of production, such as
physical and human capital and other economic control variables.
The narrative of the Spanish crises and estimations alike suggest that previous
current account deficits could explain higher output losses and lower economic growth.
balance could produce a positive effect on economic growth if the origin of the economic
growth is an expansion of exports. Conversely there will be a current account deficit if the
origin of the economic expansion is private consumption or government spending (Edwards
2002).
23
In this regression 3, the current account variable is significant at 10%.
27 Why current account deficit could be related to higher drops in economic growth or
output loss? This will be contemplating in the next section.
5. Implications of current account imbalances on financial crises severity
The reasons because current account imbalances could produce more severe
crises are several. Firstly, current account imbalances could be the result of the country
attracting foreign investment from the rest of the world, as it happened in the second
part of the nineteenth century and in the second half of the twentieth century in Spain.
Big capital inflows could cause three main problems: a) they fuel speculative booms. As
explained in section 2, this occurred in Spain from 1850 when foreign capital feed the
railways and mining bubbles and also favoured banking expansion, b) international
flows of capital facilitate indebtedness or borrowing. As in most cases foreign debt is
nominated in hard currency, when the local currency depreciates, the value of the debt
rises, increasing the risk of default. This was the situation in the second half of the
nineteenth century, when private and public debt enlarged and there were several
defaults and debt restructurings such as in 1874, 1881 and 1898, c) if the countries
strongly depend on foreign capital, sudden stops could be very disruptive because
private consumption, investment, and government expenditure must be curtailed
abruptly when foreign financing is no longer available (Edwards 2000, Milesi-Ferretti
and Razin 2009). In the nineteenth century many of the Spanish current account deficits
were accompanied by a sudden reversal in the years previous to the crisis (in the crisis
of 1866, 1874 and 1892). In this period foreign capital entries were mainly portfolio
investments and they represented a high portion of total investment with some peaks in
1861 and 1862 (35 per cent of total investment), 1868 (135 per cent), 1872 (68 per
cent), 1873 (92 per cent) and 1876 (35 per cent). The growing globalisation of financial
28 markets increased the net resources available to finance the Spanish economic
modernization and debt accumulation allowed remarkable transformations in a country
with a small and underdeveloped banking system. The problems appeared as a
consequence of reversals of net capital inflows that slowed down growth and
aggravated the severity of crises since private and public investment had to rely just on
domestic savings. In the post-1950 period, when the share of foreign direct investment
(FDI) on total foreign investment increased, these sudden stops were not frequent, with
the only exception of the two years before the 1959 crisis. In the most severe crises
(1976 and 1982), when the FDI represented the 50 per cent of total foreign investment,
there was not a significant reduction in capital inflows the years previous to the crises.
Secondly, when current account imbalances are linked to strong trade deficits
they could reflect structural problems of the economy and lack of competitiveness. The
1866 and most of the Spanish financial crises that took place in the twentieth century
were accompanied by a previous high increase in the trade deficit and currency
problems. As Sardà (1948) claimed, the Spanish foreign sector has had chronic deficits
in the trade balance, which were aggravated in higher growth periods. During the
nineteenth century the relative slow growth of Spain coincided with a rise in some
particular sectors that contributed to the Spanish modernization or the beginning of
industrialization. In this case, trade deficits were mainly related with the needs of
imports for the railway constructions, and foreign capital helped to finance the
persistent deficits that happened between 1850 and 1890 and complemented domestic
savings (Prados 2010). The economic structural change during the 1920s was also
accompanied by high trade deficits that were previous to the 1931 crisis.
Whereas long-run growth before 1950 was clearly lower than in the advanced
countries, the opposite was true for the second half of the twentieth century. The
29 industrialisation, gradual liberalisation, deregulation and opening up of the Spanish
economy resulted in sustained growth and during the Golden Age (1950-1974) the GDP
per capita rose seven times more rapidly than during the previous hundred years, 18501950 (Prados 2003). But economic growth was based on domestic demand (given the
traditional weakness of exports) and it had high needs of capital and energy imports.
The result was a trade deficit that increased from the 1950s and deteriorated during the
1960s. Initially trade deficits were compensated by the surplus in the services and
transfer balances but high current account deficits appeared when as a consequence of
the oil crisis trade deficits were not covered by the tourism revenues and the migrant
remittances (see Figure 3). Consequently, from the mid-1970s Spain had persistent
current account deficits that in most cases were above the sustainability threshold.
Therefore, the Spanish economy accumulated high external imbalances in
boom periods. When an economy opens up to the international markets and modernises,
it accumulates factors of production (capital and labour) and adopts more efficient
technology and practices with the expectation that the future income flow derived from
greater competitiveness will pay the foreign debt accumulated during the convergence
period (Correa and Ugarte 2013). Then, in the short and medium term it accumulates
current account deficits that the country expects to compensate with future income
flows. The problem is what happens when current account deficits are persistent and
they surpass the so- level. When these persistent or chronic current account deficits
became unsustainable, they act as a factor of vulnerability and at the end the country is
punished by the financial markets and the result is a severe financial crisis. Some
authors made the same assessment for the 2008 Spanish crisis (Ortega and Peñalosa
2012, Correa and Ugarte 2013).
30 To sum up, in Spain the two periods with higher crisis severity were 1850-1914
and 1973-2000, that coincided with the two globalisation periods. The narrative of the
crises and our empirical analysis show that current account imbalances were behind the
most severe Spanish financial crises. However, the nature and implications of external
imbalances were different in the nineteenth and the twentieth century. In the nineteenth
century current account deficits reflected a low level of national savings relative to
investment. Sharp reversals in foreign capital inflows produced by domestic or external
shocks in the years previous to the crises were highly disruptive because investment and
government expenditure were very dependent from foreign borrowing. However, in the
second-half of the twentieth century, current account deficits were the result of trade
deficits accumulated after a period of economic growth that highlighted the structural
problems and the lack of competitiveness of the Spanish economy.
6. Conclusions
From the study of the 18 financial crises that have occurred in Spain over the last
150 years, we document that the post-1973 crises were more severe, with a cumulative
GDP loss of 14.3 (up to 25.97 per cent in 1976), a double impact than in the world
average and only surpassed by the 2008 crisis. However interwar crises, including the
1930 depression, were less depth in Spain by 4.12 per cent, a third lower impact than
the world average.
We record the main drivers of the Spanish financial crises severity being the
most common warning that previous current imbalances are related to a higher
macroeconomic impact, as it happened in the nineteenth century crises and 1976 and
onwards crises. However, credit expansion was not important until the twentieth century
financial crises, and moreover with different consequences in the 1930 and 1976 crises.
31 We estimated the relationship between the main hypothesis and other robust control
variables and we found that current account is the variable more highly associated with
crisis intensity. It seems to be a relationship between economic expansions linked to
industrialisation and modernization of the Spanish economy and high current account
deficits especially important during the periods of capital globalisation when capital
inflows were easier and greater.
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37 Appendix
Crises Definitions
Currency crises: a currency crisis occurs when a speculative attack on the exchange
value of a currency results in a devaluation (or sharp depreciation), or forces authorities
to defend the currency either by spending large amounts of international reserves or by
sharply raising interest rates. We use the Eichengreen, Rose and Wypplosz (1997)
index, which considers all these factors when identifying currency crises together with
other quantitative data and qualitative information.
Banking crises: to identify the main Spanish banking crises, we used three indicators:
a) changes in the deposit-to-currency ratio, b) bank real stock prices and c) the number
of bank failures, using also qualitative information.
Stock market crises: in keeping with Barro and Ursua (2009), we define a stock market
crash as a downturn in the stock price index of more than 25% compared to the nearest
historical peak.
Twin 1: we consider “twin 1” crises as a combination of currency and banking crises.
Twin 2: “twin 2” crises are a combination of banking and stock market crises).
Twin 3: “twin 3” crises are a combination of currency and stock market crises
Triple crises: we consider triple crises as a combination of currency, banking and stock
market shock.
38 DATA APPENDIX: Definition of Variables and Sources
Variable name
Definition
Source
Extra growth
Average growth for the three years
prior to the crisis in relation to the
trend growth of those years
Prados (2003)
GDP and GDP per
capita
Credit growth
Current
GDP
Foreign
Debt/GDP
Prados (2003)
Real credit growth over the five
years prior to the crisis. It includes
banking and saving banks loans.
1856-1873 and 1900-2000
Martín Aceña and Pons
(2005), 1974-1900 own
estimates from Tedde and
Tortella (1974)
1850-1874, Moro, Nuño
and Tedde (2014), 18741913 Prados (2010a), 19312000 Tena (2005)
Account/
Ratio of the current account to
GDP over the three years prior to
the crisis
Public
Ratio of Foreign Public Debt to
GDP over the five years prior to the
crisis
Human
Capital
per
hour
(estimation à la Mincer), 1850=100
1850-2000, Comín and Díaz
(2005)
Gross Fixed Capital
Formation/GDP
Exports minus imports to GDP
Prados (2003)
Human Capital Index
Investment/GDP
Trade balance/GDP
Deposit to currency
ratio
Total Deposits to total currency
Prados and Rosés (2010b)
Exports and Imports: Tena
(2005)
GDP: Prados (2003)
Martín Aceña and Pons
(2005)
39 Table 1: Spanish financial crises, 1850-2000, all types of crises
Betrán, Martín Aceña and
Pons (2012)
Types: C, B, SM
Period: 1850-2000
1850-1913
1855
1866
1874
1882
1892*
1899
1905
SubTotal
1914-1939
1940-1972
B, SM (Twin 2)
B, SM (Twin 2)
B
C, B, SM (Triple)
SubTotal
4
1943
1948
1958
Jordá et al
(2011b)
Types: B
Period: 18702000
1883
1890
0
1931
SubTotal
Types: C,B
Period: 1880-1998
SM
B, SM (Twin 2)
SM
C, B, SM (Triple)
B, SM (Twin 2)
C
SM
7
1914
1921
1924
Bordo et al (2001)
1920
1924
1925
1931
3
1958
B
B
B
C,B
1976
C, B, SM (Triple)
1982
1991
1995
C
C, SM (Twin 3)
C
1967
1971
1976
1977
1982
1992
1995
ED
ED
ED
1920
B
1931
1936/39
B
DD
B
B
1913
1920
1924
B
B
B
1931
B
3
C
1
1973-2008
1851
(1837/67)
(1877/82)
2
4
C
SM
C, SM (Twin 3)
Reinhart and Rogoff
(2010)
Types: B, ED, DD
Period: 1850-2008
0
C
C
C
B
C
C
C
1978
B
1977
B
2008
2008
B
SubTotal
4
7
B
2
TOTAL
18
12
7
Notes: C: Currency, B: Banking, SM: Stock Market, ED: External default, DD: domestic default. Twin 1
is a combination of currency and banking crises. Twin 2 is a combination of banking and stock market
crises. Twin 3 is a combination of currency and stock market crises. Triple is a combination of currency,
banking and stock market crises. * 1892 stock market crisis and 1890 banking crisis.
Source: Betrán, Martín Aceña and Pons (2012), Bordo et al (2001), Jordá et al (2011b), Reinhart and Rogoff (2010).
40 Table 2: Duration and Depth of Crises in Spain, by year and type of crisis considering all
types of crises and Crises at international center
Crisis
year
1855
Type of crisis
Average
Duration
in years
Stock Market
Average
Depth
(cumulative
GDP loss %)
3
Crises at international center
-5.62
Failure of Overend, Gurney &
Co in London
1866
Twin 2 (B+SM)
3
-11.28
German and Austrian
stock markets collapse, May
1873
1874
Stock Market
1
-10.58
1882
Triple (C+B+SM)
6
-13.52
5
1
1
2.83
-11.77
-0.25
-3.24
-8.04
1892* Twin 2 (B+SM)
1899 Currency
1905 Stock Market
1850-1913
Banking panic and Stock
market crash in Paris
Baring Crisis, 1890.
First World War financial
crisis
1914
Twin 2 (B+SM)
2
-3.46
Post First World War crisis
1921
1924
Twin 2 (B+SM)
Banking
1931 Triple (C+B+CM)
1919-1935
1943 Currency
1948 Stock Market
1958 Twin 3 (C+SM)
1945-1972
1976 Triple (C+B+SM)
1982 Currency
1991 Twin 3 (C+SM)
1995 Currency
1973-2000
1
1
3
1.75
1
3
3
2.33
5
5
4
2
4
0
0
-13.04
-4.12
0
-7.97
-9.57
-5.85
-25.97
-23.62
-6.25
-1.48
-14.33
1929-1931 Wall Street stock
market crash and banking
crises
UK and USA currency crises
UK and USA currency crises
UK and USA currency crises
UK and USA currency crises
Note: C: Currency, B: Banking, SM: Stock Market, Twin 1 is a combination of currency and banking
crises. Twin 2 is a combination of banking and stock market crises. Twin 3 is a combination of currency
and stock market crises. Triple is a combination of currency, banking and stock market crises. * 1892
stock market crisis and 1890 banking crisis.
Source: Betrán, Martín Aceña and Pons (2012)
41 Table 3: Entries of foreign capital in the Spanish economy
Entries of foreign capital by sector (in %)
Railways
(%)
Banking
(%)
Mining
(%)
Industry
Public
and other
debt
(%)
(%)
Total
Net flows
Ratio Net
of Foreign
flows of
capital
(%)
(1)
Foreign
(million
capital on
current
Total Gross
pesetas
Investment
1856
31.98
63.5
4.5
100
66.6
4.57
1857
86.38
13.33
0.28
100
106.5
3,47
1858
92.34
7.47
0.2
100
156.7
3.27
1859
93.79
5.98
0.22
100
178.9
3.02
1860
99.84
0
0.16
100
190.6
3.37
1861
85.91
10.29
3.79
100
92.3
6.37
1862
95.47
2.53
1.55
100
225.2
35.62
1863
77.67
20.74
1.59
100
219.9
25.61
1864
106.64
-9.95
3.32
100
105.5
19.24
1865
76.84
0
23.16
100
27.2
5.85
1866
65.35
0
34.65
100
10.1
2.20
1867
83.33
0
16.66
100
21
22.98
1868
10.44
-7.29
0.94
100
371.7
0.74
1869
120.12
-32.81
12.69
100
32.2
8.17
1870
359.29
-291.66
32.41
100
10.8
29.01
1871
81.68
0
9.05
9.26
100
47.5
7.73
1872
11.0
0
4.46
7.64
76.88
100
282.5
1.46
1873
9.02
-3.28
8.13
17.53
68.59
100
344.5
1.09
95.91
Note: (1) Moro, Tedde and Nuno (2014) assume that there was no investment by Spanish residents in
foreign countries and thus they set the gross outflows equal to zero in order to compute the net inflows.
Therefore, net flows of foreign capital are equal to capital entries in this period.
Source: Moro, Tedde and Nuno (2014, p.26), Gross Investment: Prados (2009, p.50)
42 Table 4: Trade and current account balance and openness rate, 1920-1934
1920
1921
1922
1923
1924
1925
1926
1927
1928
1929
1930
1931
1932
1933
1934
Trade
balance
(million
pesetas)
Ratio Trade
Balance/GDP
-1332.2
-741.1
-1193.8
-1651.7
-1396.4
-1054.8
-395.4
-761.2
-1108.1
-1254.6
-980.6
-514
-646
-447
164
-4.67
-2,85
-4.42
-6.27
-4.87
-3.45
-1.33
-2.84
-3.58
-3.74
-2.90
-1.55
-1.95
-1.41
0.47
Current
account
balance
(million
pesetas)
-516
-82
-105
531
Ratio Current
Account
balance/GDP
-1.55
-0.25
-0.33
1.52
Openness rate
(Exports +
Imports/GDP)
(%)
22.96
24.09
17.87
15.58
19.39
17.76
17.26
14.05
14.42
15.62
16.84
16.91
15.12
15.26
11.24
Source: Tena (2004)
43 Table 5: Dependent Variable Output Loss
(1)
(2)
(3)
(4)
(5)
(6)
-1.016
-0.694
-0.708
-0.873
-1.878
-0.450
(2.084)
(2.413)
(2.713)
(3.124)
(3.464)
(2.663)
1.434***
1.410**
1.415**
1.348*
1.386**
1.566
(0.366)
(0.506)
(0.535)
(0.634)
(0.510)
(0.888)
-0.211
-0.338
-1.166
-0.404
7.385
(12.38)
(11.83)
(12.78)
(9.898)
(17.67)
-0.206
-2.407
-0.626
-4.959
(9.352)
(11.41)
(9.734)
(10.97)
VARIABLES
Ln GDP
Current Account (CA)
Real credit growth (credit)
Interaction: CA*credit
Capital mobility dummy
-1.991
(3.260)
Foreign Debt/GDP
-0.118
(0.0814)
Extra-growth
0.887
(0.950)
Constant
1.713
-2.247
-2.121
0.784
10.40
-4.794
(17.69)
(20.38)
(23.15)
(28.45)
(30.86)
(23.19)
Observations
15
13
13
13
13
13
R-squared
0.202
0.207
0.207
0.217
0.240
0.279
Note: Dependent variable: Output Loss, as defined in the text. Explanatory variables: Ln GDP; Current Account (CA), current
account balance 3 lags, Real credit growth (credit), with 5 lags, Interaction, the interaction between Current account and Real credit
growth, Capital mobility dummy takes the value 1 when there is a period of capital globalisation (1880-1913 and 1971-2000),
Foreign Debt/ GDP, Foreign Public Debt on GDP with 5 lags, and Extra-growth is the average growth for the three years prior to the
crisis in relation to the growth trend of those years. Robust standard errors in parentheses *** p<0.01, ** p<0.05
44 Table 6: Dependent variable per capita GDP growth
(1)
(2)
(3)
(4)
(5)
(6)
1.822**
2.066***
1.492**
1.384*
0.632
1.391**
(0.602)
(0.575)
(0.641)
(0.690)
(0.870)
(0.461)
0.415
(0.249)
0.416
(0.336)
0.566*
(0.286)
0.508
(0.339)
0.553**
(0.222)
0.495**
(0.152)
4.285
0.392
-0.308
0.538
-3.410
(6.169)
(5.067)
(4.574)
(5.155)
(3.162)
-6.350**
(2.675)
-8.225**
(3.095)
-6.307**
(2.505)
-3.762
(2.111)
VARIABLES
Ln per capita GDP
Current Account (CA)
Real credit growth
(credit)
Interaction: CA* credit
Capital mobility
dummy
-1.960*
(0.953)
Foreign debt /GDP
-0.0691
(0.0486)
Extra-growth
-0.446**
(0.156)
Constant
Observations
R-squared
-10.60**
(3.892)
-12.83**
(3.954)
-9.374*
(4.088)
-7.341
(4.040)
-3.173
(5.539)
-8.602**
(2.777)
15
13
13
13
13
13
0.322
0.521
0.643
0.733
0.757
0.811
Note: Dependent variable: per capita GDP growth. Explanatory variables: Ln GDP per capita; Current Account (CA), current account
balance on GDP with 3 lags, Real credit growth (credit), with 5 lags, Interaction, the interaction between Current account and Real
credit growth, Capital mobility dummy takes the value 1 when there is a period of capital globalisation (1880-1913 and 1971-2000),
Foreign Debt/ GDP, Foreign Public Debt on GDP with 5 lags, and Extra-growth is the average growth for the three years prior to the
crisis in relation to the growth trend of those years. Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.
45 Table 7: Growth regressions (Dependent variable: GDP per capita growth)
(1)
(2)
(3)
(4)
-0.0941**
(0.0383)
-0.0929**
(0.0376)
-0.0905**
(0.0422)
-0.0909**
(0.0396)
Investment/GDP
0.00546***
(0.00143)
0.00536***
(0.00142)
0.00555***
(0.00132)
0.00654***
(0.00162)
Human Capital
0.00138*
(0.000679)
0.00147**
(0.000609)
0.00143*
(0.000673)
0.00152**
(0.000702)
Crisis
-0.0527
(0.0429)
-0.0552
(0.0418)
-0.0578
(0.0484)
-0.0554
(0.0415)
Current account (CA)
0.00549*
(0.00286)
0.00565*
(0.00279)
0.00617
(0.00352)
0.00790**
(0.00365)
glob1 dummy
0.0108
(0.0131)
0.0118
(0.0149)
0.0142
(0.0155)
0.00231
(0.0167)
glob2 dummy
0.0325
(0.0209)
0.0274
(0.0237)
0.0245
(0.0280)
0.0164
(0.0239)
0.0485
(0.0378)
0.0387
(0.0533)
0.0212
(0.0550)
-0.0132
(0.0428)
-0.0108
(0.0419)
Ln per capita GDP
Real Credit growth (credit)
Interaction: CA*credit
Foreign debt /GDP
Constant
Observations
R-squared
0.000869
(0.000577)
0.0387
(0.0258)
0.0226
(0.0347)
0.0186
(0.0401)
-0.00735
(0.0364)
26
0.507
25
0.544
25
0.546
25
0.624
Note: The variables are average of non-overlapping five-year periods. Dependent variable: Growth is the average
annual growth of real per capita GDP. Explanatory variables are at the initial year of each period: ln GDP per
capita, Investment/GDPt is the Gross Fixed Capital Formation on GDP, HC is Human Capital index (see text),
Crisis is the average years of financial crisis, Current account (CA), current account balance on GDP (CA), Credit
growth (credit), real credit growth, Interaction, the interaction between current account and credit, Foreign
debt/GDP. Foreign Public Debt on GDP, and Glob1 and Glob2 dummies are for the two periods of capital
globalisation (1880-1913, 1971-2000). Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0
46 Figure 1: Pre-crisis dynamics of the Current account/GDP ratio
1866, 1874, 1882 and 1892 crises
1874 crisis
1866 crisis
0.0
1862
1863
1864
1865
1.0
1866
-1.0
0.0
-2.0
-1.0
-2.0
-3.0
%
%
1870 1871 1872 1873 1874
-3.0
-4.0
-4.0
-5.0
-5.0
-6.0
-6.0
CA
CA
1882 crisis
1892 crisis
2.0
2.0
1.0
1.0
0.0
1878
1879
1880
1881
0.0
1882
1888
-2.0
1890
1891
1892
-2.0
-3.0
-3.0
-4.0
-4.0
-5.0
-5.0
-6.0
-6.0
CA
1889
-1.0
% %
-1.0
CA
47 Figure 2: Deposit to currency ratio
2.0
1.8
1.6
1.4
1.2
1.0
1935
1934
1933
1932
1931
1930
1929
1928
1927
1926
1925
1924
1923
1922
1921
0.6
1920
0.8
48 Figure 3: Trade balance/GDP and Current account
balance/GDP
8.0
6.0
4.0
0.0
-2.0
1850
1855
1860
1865
1870
1875
1880
1885
1890
1895
1900
1905
1910
1915
1920
1925
1930
1935
1940
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2.0
-4.0
-6.0
-8.0
-10.0
Trade on GDP
CA on GDP
49