IMF says crisis, slow recovery key risks for Spain

MADRID Tue Jun 21, 2011 3:40pm EDT

Spanish Economy Minister Elena Salgado speaks during a news conference in Madrid May 31, 2011. REUTERS/Juan Medina

Spanish Economy Minister Elena Salgado speaks during a news conference in Madrid May 31, 2011.

Credit: Reuters/Juan Medina

MADRID (Reuters) - Spain faces considerable risks to its recovery and must deepen and conclude reform work to allay market concerns, the International Monetary Fund said on Tuesday.

In an annual mission report, the IMF said Spain's wide-ranging policy response last year had helped the economy to rebalance, but the repair of the economy was incomplete and risks were considerable.

"There can be no let-up in the reform momentum, including further enhancing the credibility of fiscal consolidation, completing financial sector restructuring," the IMF said.

Spain has been under intense scrutiny since the beginning of the euro zone debt crisis over concerns the bloc's fourth-largest economy would be forced to follow Greece, Ireland and Portugal in seeking a bailout package.

A slew of reforms and austerity measures have helped calm fears, though the premium investors demand to hold Spanish over German debt remains near euro-era highs as concerns persist over Greece.

Risks over the outlook for Spain meant reforms made to date, including in the labor and pension sectors, must be strengthened, the organization said.

REPORT POSITIVE

Spain's Economy Minister Elena Salgado said in a telephone interview with Reuters the report was positive and the IMF's position that the reforms should be consolidated was shared by the government.

"We completely agree with the IMF and, in order to do this, we will see this legislature through to the end," she said.

Spanish media has been speculating that the government, lead by Prime Minister Jose Luis Rodriguez Zapatero, would not last until general elections in March and would call voters to the polls before the end of the year.

The government's latest overhaul of collective bargaining would be ratified by parliament on Wednesday, Salgado added.

The government's public deficit target of 6 percent of gross domestic product this year, after 9.2 percent of GDP in 2010, was "within reach," the IMF said.

If near-term risks materialize then some additional measures may be needed, the IMF warned.

The medium-term targets were also appropriate but under the mission's least optimistic projections additional fiscal measures worth about 2 percent of GDP will be required through until 2014.

The key risk to Spain in the near term was the possibility of further deterioration of financial conditions in the midst of a euro zone debt crisis, it said.

In the medium term the key risk was a protracted recovery, and especially stubbornly high unemployment, which it expected to only moderately fall in the medium term.

The IMF also said the recovery would continue to be export-led, with growth gradually rising to 1.5 to 2.0 percent in the medium term.

"The moderate pace reflects the need to unwind accumulated imbalances, high unemployment, fiscal consolidation, and the still-tight financial conditions facing the Spanish economy," the mission said.

(Editing by James Dalgleish)

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