Spain Receives IMF Praise and Warning, Potential Downgrade From Investors

Aug. 31, 2011 - PRLog -- The IMF praised Spanish government's "strong and wide-ranging" response to its economic crisis last month but warned that many of the underlying problems have not been fully addressed. It urged the Socialist government to strengthen reforms already underway, in particular concerning the labour market, and warned of the risk of contagion from the eurozone debt crisis. Spain, with an economy the size of Greece, Ireland and Portugal combined, is now battling to convince markets that it should not be lumped together with the three lame ducks now under EU and IMF rescue programmes. The report, a so-called article IV assessment, praised Spain for its “strong and wide-ranging” response to economic challenges in the last year. The country met its 2010 budget deficit target, forged ahead with efforts to curb the cost of its pension system and reshaped its banking industry by forcing lenders to meet minimum capital requirements. The assessment coincided with Prime Minister Jose Luis Rodriguez Zapatero’s decision the same day to call early elections on Nov. 20 and Moody’s Investors Service’s warning that it may downgrade Spain. In its report, the fund maintained its predictions for Spain’s economic growth, forecasting expansion of 0.8 percent in 2011 and 1.6 percent next year. The euro-region’s fourth-biggest economy is trying to rein in surging borrowing costs that have pushed the yield on its 10-year bond above 6 percent, hindering efforts to stoke growth as unemployment stays above 20 percent.

The bursting of the property market bubble and the international financial meltdown plunged Spain into recession in late 2008. The economy stabilised in 2010 and has shown slow growth in early 2011. The crisis sent the unemployment rate soaring to 21.29 percent in the first quarter of 2011. The rate eased to 20.98 percent in the second quarter, according to official data, but remained the highest in the European Union and among countries of the Organisation for Economic Cooperation and Development. The IMF said Spanish banks that need capital should raise it “promptly from the market” to help allay concerns about the health of the financial system. The Bank of Spain, which said in March that 12 lenders would need to raise 15 billion euros ($22 billion) to meet new capital requirements, said this month the process of recapitalizing the system is now almost complete.

Financial markets face more turmoil after Moody's put Spain's Aa2 credit rating on review for possible downgrade while US debt talks are still deadlocked. The news sent the euro falling and stock markets in London and the eurozone down. Nervousness among international investors has sent Spanish government bond yields to their highest level in over a decade. The IMF said that in terms of Spain’s efforts to cut its budget deficit, the “larger risk” to the 2011 target is that some regional governments may not keep to spending limits. Meanwhile, Spain should make an early commitment to balancing its books over the medium-term, while meeting medium- term fiscal requirements “will likely require further action.” The fund’s staff predicts the deficit will narrow to 4 percent of gross domestic product by 2014. Taking into account the risk of a potentially weaker outlook and the possibility that the regions will miss their targets, additional measures of about 2 percent of GDP would be needed to reach the government’s goals.

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