Spain’s government on the right track to reform, says the IMF

Spanish authorities have taken strong measures to face the current economic crisis on several fronts, but mounting market pressure on Spain and soaring borrowing costs would have negative consequences for the rest of Europe, the International Monetary Fund (IMF) has warned.

In its annual report on the Spanish economy, the IMF said Spain’s economy has entered an unprecedented double-dip recession with unemployment already very high and public debt increasing rapidly.

Major policy actions have been already taken. Bank’s provisions and capital requirements have been raised, independent valuations commissioned, and a backstop provided with support from Spain’s European partners, the IMF said.

Key policies incorporated to accompany this backstop are identifying individual bank capital needs based on a comprehensive asset quality review and an independent bank-by-bank stress test recapitalizing; restructuring and resolving weak banks; segregating legacy assets of weak banks into an asset management company; burden sharing from hybrid and subordinated-debt holders in banks receiving; strengthening supervision and regulation.

In July, the Council of the European Union recommended until 2014 for Spain to reduce its deficit below 3% of GDP and loosened the targets for 2012-14. In order to achieve the new targets, the government increased VAT and reductions in civil service remuneration and unemployment benefits.

On regional governments, the government initiated the first step in the warning process for several regions at risk of missing targets, monthly reporting from October, and a new funding mechanism, the IMF said.

But the institution underlined the urgency of additional progress to boost competitiveness and employment,  despite recent labor market measures taken to reduce market duality and wage rigidity, and increasing firms’ internal flexibility.

Finally, the report said, the success of this strategy in restoring confidence, jobs, and growth depends critically also on progress at the European level in strengthening the currency union.

 

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