What if spain defaults

The Insolvency Act sets out a series of situations in which the company is deemed to have knowledge of insolvency. The directors may be responsible for the company's debts if they were aware of the financial situation of the company but did not promote or suggest insolvency proceedings. Currently, in response to the COVID pandemic, the Spanish government has extended the obligation to apply for tenders until December There is no time limit in which a creditor or shareholders must file an insolvency petition, provided the objective grounds for insolvency are met see below, Substantive tests.

Substantive tests. An insolvency petition can be filed if a company is unable to pay its debts as they become due current insolvency or if it foresees that this will happen in the near future imminent insolvency. If a company files an insolvency petition, it must provide evidence of its debts and its current or imminent insolvency. If a creditor files an insolvency petition, it must be based on one of the following grounds:.

The company has failed to pay debts when they became due. The creditor cannot exercise its security rights because the company's assets have been seized. The company has disposed of or liquidated assets to put them beyond creditors' reach.

The company has defaulted on one of the following in the three months before the insolvency petition is filed:. The aims of the proceedings depend on whether the debtor is being rescued or liquidated bankruptcy :. Rescue covenio. The objective is to restructure the debt to allow the debtor to continue operating.

If the debtor has requested rescue, an arrangement with its ordinary creditors must be reached and approved by the creditor at a creditors' meeting, and by the court. The agreement can also be reached in writing without holding a creditors' meeting. The debtor or its creditors can make an arrangement proposal. If made by the company and liquidation is not required, the proposal can be put forward before the end of the period in which the creditors must submit proof of their claims convenio anticipado.

This proposal may provide for termination of the proceedings by fast track see below, Length of procedure. If the anticipated arrangement is not put forward by the debtor, the debtor or the creditors can propose a suitable expiration period for contesting the inventory of assets and list of creditors. Following the reforms introduced to the Insolvency Act, privileged creditors may be affected by the agreement if they vote in favour of it. On one hand, the privileged creditors are included in the constitution quorum of the creditors meeting, and on the other hand, in order to get the arrangement proposal accepted by the creditor's meeting, the privileged creditors will be considered included in the required ordinary majorities, if they vote in favour of such a proposal.

If they join the arrangement, they will lose their preferential status and will be subject to the proposed debt repayment structure of the agreement itself. Creditors with subordinated debts or debts acquired after insolvency is filed cannot vote on the arrangement. However, they will become affected as the ordinary creditors if the proposal is finally accepted. Consent and approvals. However, if the total value of debts owed to ordinary creditors voting in favour of the arrangement is greater than the total value of debts owed to ordinary creditors voting against the arrangement, it can be approved if either:.

The agreement provides for ordinary debts to be repaid in full within three years. Since , to get the arrangement proposal accepted by the creditor's meeting, the privileged creditors will be considered included in the required ordinary majorities, if they vote in favour of such a proposal. The agreement approved by creditors must be confirmed by the court if both:.

Statutory requirements are met. No creditor objects to the arrangement or, if an objection is made, it is rejected by the court. No consents or approvals are required if a company is to be liquidated.

The company can request liquidation itself or it starts automatically if no agreement is proposed in the due term, or is rejected. The objective is to sell the assets of the debtor company to repay as much of the debt owed to the creditors as possible. Once the liquidation phase is opened, the management of the insolvent company cease on its functions and the insolvency administrator becomes the only person with capacity to represent and manage the company until its final liquidation and dissolution.

Every three months after the liquidation phase is opened, the insolvency administrator must submit a liquidation report before the court in order to inform about the liquidation tasks and the payment of credits against the state done during such quarterly period. The insolvency administrator must also submit a liquidation plan explaining the way proposed to liquidate all the insolvent company assets.

However, there are three exceptions when it will be possible to continue execution proceedings after the insolvency declaration and until the liquidation plan's approval:. Public executions if a seizure report has already been ruled on. Labour executions, where company assets would have been already seized. If a mortgage is over assets that are not necessary to continue the company's activity only in the event of a foreclosure.

In both cases the seizures must have been declared before the insolvency declaration. Supervision and control. During insolvency proceedings, the court appoints a person to administer the insolvent company, which can take the form of either intervening in the administration of business activities or taking direct control in place of the company's managers.

Protection from creditors. During the insolvency proceedings, the creditors cannot commence any in-court or out-of-court execution proceedings, or administrative or state tax writs against the assets. Length of procedure. It is difficult to estimate how long insolvency proceedings will take, but 12 to 20 months is usual, depending on the complexity of the case. A shorter procedure procedimiento abreviado is available to companies, whereby a liquidation plan that contains a binding written proposal to buy the production unit running or companies that have completely stopped activities and did not have employment contracts.

The judge may decide to process the bankruptcy by procedimiento abreviado if he considers that there is little complexity that is, there are fewer than 50 employees, assets and rights that do not exceed EUR5 million and liabilities do not exceed EUR5 million. If this procedure is used, the statutory time limits set out in the Insolvency Act are reduced by one-half. It should also be noted that, due to the COVID pandemic, the Spanish courts have been closed for four months and the estimated length of procedure may therefore be longer.

Insolvency proceedings have the following effects:. In a voluntary insolvency, directors remain in their positions and the company continues managing its assets, subject to the supervision of the receivers, or insolvency administrator administrador concursal , unless the court forces it to be treated in the same way as a compulsory insolvency see below.

In a compulsory insolvency, receivers take over the administration of the company's assets, unless the court orders it to be treated in the same way as a voluntary insolvency, and therefore the directors remain in their positions see above. Unless the company asks for liquidation, its business does not usually cease on insolvency see Question 9.

If the receivers are merely supervising, they determine the activities and transactions that the company can continue to manage in the ordinary course of business.

If the receivers take over the management of the business, they must take the necessary steps to ensure that its commercial activities continue. During insolvency proceedings, shareholders continue to function as usual, but the insolvency administrator can attend and have the right to be heard at their meetings. The same applies for the board of directors' meetings. Once a company has been declared insolvent, a list of creditors is prepared and creditors are ranked according to the priority of their debts see Question 2.

The recovery of the credit amounts depends on the outcome of the insolvency proceeding. If the company reached an agreement, the terms of the payment will be fixed there and will depend on the approved payment clauses. If the company is wound up, the ordinary and subordinated creditors will not be paid until creditors against the state and privileged creditors are fully repaid.

Any proceedings that a creditor may wish to bring against the insolvent company see Question 4 that could affect its assets must be dealt with before the insolvency judge. Once an insolvency order has been made, no arbitration proceedings can be started.

However, it is not possible to execute the judgment or award. In some cases, the insolvency court will assume the jurisdiction of the case. No individual judicial or extra-judicial enforcement actions can be brought against the company's assets, and actions that have already begun are stayed from the date of the declaration of insolvency. However, there is an exception for creditors with a security interest in property over assets of the company that are used in its commercial activities.

These creditors can bring enforcement proceedings from the date on which the composition agreement is approved or after one year of the insolvency order if the liquidation has not begun.

The company's debts cannot be set off against monies owed to it. No interest accrues, other than interest on debts that have a legal guarantee. The limitation period for actions relating to debts that pre-date the insolvency is postponed during insolvency proceedings. Contracts with mutual obligations that have not yet been performed remain in force, although the creditor can terminate them if the company defaults. Clauses allowing a contract to be terminated if an insolvency is declared are void.

During the liquidation, the company cannot administer or dispose of its assets, without consent of the insolvency administrator.

Creditors must submit proof of their claims within one month of the court's decision to start insolvency proceedings. The court declares that the conditions of the debtor's arrangement with the creditor have been fully met. The Court of Appeal Audiencia Provincial revokes the insolvency declaration. Actions for breach of the agreement have been declared lapsed or rejected by the court. In addition, insolvency proceedings end regardless of the stage they have reached provided the receivers have prepared their report and the relevant parties have attended court , if either:.

All recognised debts are repaid or the creditors are satisfied in full by other means. It is proved that the company has no assets to repay its debts and no party is liable for this lack of assets. All insolvency proceedings are concluded by court resolution. If the insolvency proceeding ends because the company's assets have all been liquidated, the company is extinguished from the Commercial Register and no other creditor or third party can bring any claim against the shareholders or contributories in relation to the company's debts.

It is possible for the company to continue activities after the conclusion of the insolvency proceeding if a resolution has been passed by the Court of Appeal to revoke the insolvency declaration. In any other case, however, the company's assets are sold off and it must stop all business activities. Such refinancing agreement regulation has also been modified by Act No. These amendments of the Insolvency Act aim to improve the refinancing agreements and to change the realities of filing for bankruptcy proceedings only 7.

Refinancing proceedings allow the debtor to reach an agreement with the majority of its bank creditors to increase the available credit or modify its obligations in order to avoid insolvency court proceedings. Refinancing proceedings are initiated exclusively by the debtor. The refinancing agreement must include a viability plan that allows the debtor to continue activity in the short and medium term.

In addition, if the debtor wants the agreement to remain out of reach of any eventual claw-back actions, the agreement must be certified by an account auditor and granted in a public deed. A report confirming the effectiveness of the proposed refinancing must be obtained from an auditor appointed by the Company's Registry Registro Mercantil , if the company does not have its own auditor.

The refinancing agreement must be granted by public deed. It is also possible for a refinancing agreement to be filed by the debtor with the court for approval. In this case, it is possible for the approved agreement to be appealed if the affected creditors file their disagreements within 15 days. There is no set length of procedure. However, the debtor or its creditors cannot file another agreement with the court until one year after the previous agreement.

The refinancing agreement provides for modification of the debtor's total available credit or the debtor's obligations. When it is approved by the required majority and by the court, it affects all the creditors that voluntarily have decided to adhere to it for example, labour credits, commercial credits or public credits or have been affected through the fulfilling of certain requirements for example, financing creditors that did not vote or vote against the refinancing agreement.

This allows the company to avoid insolvency court proceedings, provided the debtor observes the agreement's provisions. On the other hand, the Insolvency Act regulates an out-of-court refinancing agreement that has been developed by Act No. What are the main insolvency procedures in your jurisdiction? The objective of the liquidation phase of the insolvency proceeding is to liquidate the company's assets or its unit productive that is, the employees, contracts, assets, credits and debts that are considered essential for the proper functioning of the company's business activities.

The liquidation phase is initiated by court resolution. This can be requested directly through an insolvency demand petition by the debtor or insolvency administrator, or as part of an insolvency proceeding by the debtor or insolvency administrator. The company's directors must request insolvency proceedings either the common phase or the liquidation phase see below within the two months of acknowledging the insolvency situation.

If the insolvent company has no active business functions or employees and will obviously not be continued, it will be necessary to commence the liquidation phase and liquidate the assets. However, if the insolvent company's unit productive could be sold off and has a potential buyer, it is not necessary to commence the liquidation phase.

During the liquidation phase, the company's management powers are suspended and the insolvency administrator manages the insolvent company with the collaboration of the company's directors. If the insolvent company is to continue business activities, it will be necessary to maintain the company's existing business contracts.

The selling price may be above or below the current level of debt, and arrangements may be agreed with the bank to ensure that no shortfall remains. However, it is very unlikely that there will be any surplus to distribute to the debtor at the end of the process. Moreover, there is no certainty as to how long it will take to sell the property. Sometimes the process is referred to as simply 'handing back the property to the bank'.

The process must be completed using the correct procedure. It is not sufficient simply to hand the keys to the bank as the debtor will still be the registered owner of the property and debt will continue to accrue. In order to agree to a voluntary repossession the bank will need to know that someone acting on behalf of the debtor and located in Spain is in a position to sign the necessary documentation before a Spanish Notary.

The bank will then value the property and consider whether according to its current policy it is prepared to write off any shortfall. Once the bank is happy to proceed it will arrange for documentation to be signed completing the transaction. Clearly there is an obligation on the debtor to repay the debt, whereas the banks are under no obligation to accept a voluntary repossession.

As a consequence, deposit holders will reduce deposits, which causes a tightening of the leverage constraint.

Finally, the number of external bonds is determined by the size of externally financed capital injections to banks:. So we get for the return on such a security:. This fiscal limit, which is assumed to be constant across time, can be mapped one to one into a constant maximum level of debt, beyond which the government will partially default on its outstanding liabilities.

We first take a look at the government budget constraint in case the government would honor all outstanding obligations. The no default budget constraint would then be given by:. The lump sump tax depends on the level of outstanding debt and financial sector support and is given by the following tax rule:.

This approach is used by Claessens and van Wijnbergen in their evaluation of the Mexican Brady plan debt restructuring. A few comments are in order. This approach to sovereign default falls under what Aguiar and Amador call non-strategic default. The sovereign defaults after an unanticipated large shock drives the debt over a maxumum level compatible with the maximum tax revenue cosntraint the sovereign faces. The defaults are not a strategic choice, as they are for example in Arellano and in much of the recent debt crisis literature surveyed in Aguiar and Amador , our default model is closer in spirit to the debt overhang literature in corporate finance.

Also, in line with that latter literature, defaults are partial, while most of the strategic default literature assumes default to be a 0—1 decision, once a sovereign defaults it defaults on all outstanding debt. However this is mostly an ad hoc assumption made to avoid having to endogenize post-default bargaining, and in striking contradiction of almost all actual sovereign defaults Cruces and Trebesch Finally since we do not model default as the outcome of a strategic choice, there is no need to incorporate an explicit punishment mechanism like exclusion of capital markets after a default.

Our focus is on the bond price impact after an increase in ex ante sovereign default risk , rather than the losses arising from an actual default. A more elaborate description of the maximization problem of the intermediate goods producers can be found in the Online Appendix. The expression for the capital stock after the capital producers have produced or output of capital producers is then:.

The resulting first order conditions are standard, and can be found in the Online Appendix. They face the following technology constraint:. Final good producers operate in a perfectly competitive market. Final goods are sold to households and government for consumption, and to capital producers as input for investment. The real return on deposits is given by:.

In equilibrium, there is clearing in all markets. For the goods markets this entails that aggregate supply equals aggregate demand:. In the asset markets, the number of loans to the intermediate goods producers must equal the size of the capital stock and the number of bonds owned by financial intermediaries must equal the number of bonds issued by the government:.

The model described above is calibrated to match the Spanish economy as closely as possible. Several parameters are taken from Burriel et al. The annual fixed real payment on long-term government bonds is set to 4. The ratio of investment, government consumption and government debt over GDP are derived from Eurostat The year average percentage of GDP that can be ascribed to private investment and government consumption is taken between and This results in steady state ratios of Loan rates are not available before We end the sample at the end of to exclude data from the Great Recession.

For the — period we arrive at an average annual credit spread in Spain of basis points annually , which amounts to a steady state quarterly spread of 47 basis points. We set the diversion rate for external bonds equal to zero, as these are assumed to be safe and liquid assets. For the steady state leverage ratio we take the average ratio of consolidated equity to consolidated financial assets of the Spanish financial sector between and from the OECD Stats database.

This results in a steady state leverage ratio of 5. Given the fact that the loans to the private sector are state-contingent, and thus more equity-like, more volatility is generated in bank net worth everything else equal.

The steady state ratio of government debt to annual output is set to A more detailed explanation of the calibration of the default parameters can be found in the Online Appendix. To assess whether the calibrated model can mimic the dynamics in the Spanish data, we compare basic business cycle statistics generated by the model with Spanish data over the period — We choose this period, because key variables like the loan rate, necessary for calculating the credit spread, are only available from We end the sample at the end of to exclude data from the Great Recession and the European sovereign debt crisis.

As sovereign default risk was basically non-existent during the — period, we perform the moment-matching exercise assuming sovereign default risk is absent, which we implement by setting the maximum level of government debt very far away from the steady state level of government debt.

We take the standard deviations of the cyclical components of Spanish real GDP and gross fixed capital formation to match the standard deviations of the cyclical components of output and investment from the simulated model.

For the credit spread, we take the timeseries described in Sect. Simulated moments from the model are then compared to the data. In addition, we report the first order autocorrelations for the same variables.

Footnote 6. The results of this exercise are reported in Table 2. We indicate the statistical significance of differences between the empirical moments and the simulated moments by reporting the associated t -statistics in square brackets. We see that the standard deviations for GDP, credit spread and investmentl are matched well by the model, as indicated by an absolute value of the t -statistic below 2.

This is not surprising, as these were the three moments we targeted in our simulation. In addition, we report the standard deviation of bank capital for both the data and the simulated model, and we find that the model matches the data in this dimension as well, as the accompanying t -statistic is below 2 in absolute value, in spite of the fact that this variable was not included in the target list.

We also inspect another aspect of the dynamics of our model, namely the first order autocorrelations for the same variables, in columns 4 and 5 of Table 2. Similar to the standard deviation for bank capital, we did not target these moments in the moment matching exercise. We nevertheless find that the first order autocorrelations of the simulated model and the data do not differ statistically significant, as the t -values for all variables are below 2 in absolute value.

We conclude that our calibrated model captures the dynamics observed in the data reasonably well. To analyze the surprizing responses to the Spanish attempts to rescue their banking system, we first simulate an internally financed bank recap.

We compare the case with no additional government policy, and contrast the results with the case where the government issues additional debt to fund a recapitalization of the Spanish banking system Sect. We pin down the timing of our simulation by looking at the unfolding of the events in Spain.

Losses on mortgages and construction loans first started to hit the Spanish financial sector in late , with output falling after the first quarter of The first period in our simulations therefore coincides with the beginning of The actual recapitalization of the Spanish banks mainly took place at the start of We therefore set the recapitalization to occur 8 quarters after the start of the financial crisis. As to the financial crisis to which the policies are a response, we follow a different approach than most of the Financial Frictions literature sofar.

In this setup the crisis originates in the real sector and spills over into the financial sector. Instead we let the original shock occur within the financial sector itself, with subsequent negative real sector effects through the ensuing credit tightening.

Footnote 7. The results from this first experiment are displayed in Fig. This case is displayed by the solid blue line. Consider first the no intervention case. A tighter balance-sheet-constraint pushes up credit spreads, which reduces the demand for private loans with a drop in the price of capital as a consequence. A lower resale price of capital further decreases the ex post return on the loans to intermediate goods producers remember that the return on private loans partially consists of the proceeds from selling the capital used for production.

But losses on private loans are not the only source of losses: balance sheet tightening also pushes up interest rates on sovereign debt and lowers bond prices, resulting in capital losses for existing bond holders.

A lower capital stock results in lower marginal productivity of labor, pushing down wages and labor hired both not shown , resulting in a drop in consumption and output. The increased credit spread, however, increases bank profits from credit intermediation, and therefore restores bank equity after approximately 5 quarters, which allows an expansion of the balance sheet.

Higher interest rates on sovereign bonds reflect both the increased risk of sovereign default and arbitrage induced higher interest rates on bonds, as loan rates go up as credit spreads go up for corporates. The anticipation of a future recap, and hence a future alleviation of the balance-sheet-constraint, together with an immediate fall in bondholdings due to lower bond prices, allows financial intermediaries to expand lending to the private sector.

Credit spreads fall at the time of the intervention, and further accelerate the recovery. Consider now the impact of a direct recap funded by an external party, such as the EFSF or the ESM, which would avoid the large increase in Spanish sovereign debt that caused the trouble in the runs discussed in the previous section.

Member states of the Eurozone are still individually responsible for rescuing their banks, but they can receive funding for bank recaps from the ESM European Stability Mechanism. However that would run into the problem outlined in the previous session as the sovereign debt would increase too, to another creditor perhaps, but debt levels would rise. An alternative has been considered after these problems did in fact emerge during the interventions in the Spanish banking crisis: one of the proposed solutions to break the vicious cycle between weak banks and weak sovereigns in the Eurozone is allowing the ESM to directly recapitalize banks that face a capital shortfall.

Such a restructuring method would not force a sovereign to issue additional bonds to finance the recap, and recapitalize banks without the sovereign incurring additional debt. The positive effects from a bank recap remain, while the negative consequences of increased sovereign default risk are absent.

Figure 6 shows the differential results, comparing the consequences of a debt financed intervention with an externally financed direct recapitalization by say the ESM:. The differential impact of an externally financed recapitalization is most clearly reflected in the different developments of the bond prices.

When banks are recapitalized directly by an external party, the drop in the bond price from the direct recap is avoided altogether. Less debt issued by the government results in lower sovereign debt discounts, and hence lower or no capital losses on sovereign debt for existing bondholders.

Net worth of the financial intermediaries is now above the steady state level of net worth over the entire time path and so the leverage constraint becomes less binding which in turn results in a lower credit spread and less crowding out. All this results in a level of investment, output and consumption that is consistently above the levels that are attained by a bond financed recapitalization in the first 20 quarters after the financial crisis starts.

This experiment shows that an external recapitalization has considerable advantages over a debt-financed recapitalization. So a direct recapitalization is beneficial from an economic point of view for the receiving country.

Of course political factors might interfere, particularly if external support is linked to painful reforms. We abstain, however, from these political considerations, but conclude that for countries in severe sovereign debt trouble with banks deeply involved in the placement of sovereign debt, externally financed direct recapitalizations may be the only way a banking system can actually effectively be recapitalized.

The development of the bond price around these announcements closely resembles the results from our simulations, in which the announcement of a sizeable recapitalization causes a drop in bond prices or equivalently a rise in bond yields. Compare the data in Figs. Compared with the average interest rate of 4. Taking the interest rate at the start of May of 5. The negative feedback mechanism between the sovereign and the domestic commercial banks, whereby an increase in sovereign debt to fund the recap causes bond prices to drop and further impair commercial bank balance sheets, therefore seems to be apparent in the data during the restructuring of the Spanish financial sector, which is also indicated by a marked increase in the sovereign CDS spread.

Our simulations show that bond prices are not recovering after the recap has been announced because of the pending debt issue. They only start to recover after the recapitalization has taken place. The expected return on bonds, which is similar to the 10 year bond yield in the data, jumps upwards at the moment the recap is implemented. A similar development can be seen in Fig. Apparently the main mechanism of our model, the negative amplification cycles arising between weak bank balance sheets and increased sovereign default risk due to additional debt issue, is capable of generating the patterns observed in the data.

So it seems that amplification cycles are important in an environment where undercapitalized banks have a substantial exposure to risky domestic sovereign debt, as was the case in Spain in and in many other countries where governments face funding problems.

The negative feedback mechanism might substantially affect the effectiveness of conventional recapitalization operations to the point where such a recap harms the recovery in the short run. In that case unconventional ways of recapitalizing the banking system are necessary. One of the options we have explored in this paper is a direct recapitalization by an external party: this way the negative feedback effects on bond prices, because of increased debt issuance and higher sovereign default risk, is absent, while bank capital is increased with subsequent positive effects on the real economy.

In May the Spanish government announced a debt-financed recapitalization of the Spanish banking system, after the capital base of Spanish banks had been severely damaged following the end of the housing and construction boom of the s. Contrary to the standard theory, CDS spreads on both Spanish sovereign debt and Spanish banks went up, indicating that banking risks increased, in spite of the attempt to provide the banks with a higher capital base.

Sovereign debt discounts increased dramatically in the days following the announcement, deteriorating the fiscal position of the Spanish government, which had already incurred several setbacks due to lower tax revenues after the end of the housing and construction boom.

We propose a mechanism that can explain the events in Spain: additional debt issue to finance a recapitalization of the banking sector increases sovereign default risk, and is translated in lower sovereign bond prices. Since the undercapitalized Spanish banks are heavily exposed to risky Spanish sovereign debt, lower bond prices translate into capital losses for those banks, thereby undermining the recap they were intended to fund.

In repsonse, credit spreads and interest rates increase on non-financial corporate loans, but through arbitrage also on sovereign bonds. An additional fall in bond prices results, and so on, giving rise to a negative amplification cycle between weak commercial bank balance sheets and weak government finances.

To assess the relevance of this mechanism, we construct a DSGE model with balance-sheet-constrained financial intermediaries that finance private loans to the real economy, as well as sovereign debt with endogenously determined default risk and calibrate the model to Spanish data.

Our analysis highlights the limits to the conventional approach to bank rescues when undercapitalized banks are heavily exposed to the risky sovereign debt of the government: a debt financed recap might backfire, and become ineffective.

In that case alternative policies have to be considered, such as assistance by another actor with a stronger balance sheet. We look at one such approach, namely a direct recapitalization by a foreign entity such as the ESM. We find that the results of such an external recap are positive: bond prices do not experience the steep fall that occurs after a debt-financed recap, and there is less crowding out of private loans, leading to a faster recovery.

Although the economic benefits of such an external assistance seem clear, political factors might of course complicate this option, vide the resistance by Germany to direct recaps by the ESM. As in Acharya et al. The model is closely related to the one developed in Van der Kwaak and Van Wijnbergen The advantage of this particular way of modeling long term debt is that longer maturity can be introduced without having to expand the number of state variables.

See Woodford , For output and investment we take data from the Eurostat website. We take quarterly data that are seasonally and calendar adjusted, chain linked volumes in million euros. First we convert bank capital to real terms by dividing by the monthly CPI level in Spain. A single model simulation starts from the non-stochastic steady state and lasts for a periods.

We discard the first observations as a burn-in.