* IMF: Spain, Ireland reforms on track but challenges remain
* Both countries need to complete cleanup of ailing banks
* Job creation key for Spain, market access for Ireland
* Europe could help by pressing ahead with banking union
By Julien Toyer and Sam Cage
MADRID/DUBLIN, June 19 Spain and Ireland have
made strong progress in fixing their economies but recovery will
hinge on their capacity to clean up ailing lenders, create jobs
and maintain investor confidence, the IMF said on Wednesday.
Both countries were forced to seek international financial
support after a decade-long boom fuelled by cheap credit ended
abruptly in 2008, leaving their banks struggling with bad
property loans and their economies in slow or negative growth.
While praising Madrid and Dublin, as on previous occasions,
for their efforts to implement spending cuts and structural
reforms, the International Monetary Fund said in its annual
reviews that the outlook remained difficult in both cases.
Echoing European Commission recommendations made last month,
the Fund said Spain should further reform labour laws to make it
easier for firms to modify shifts or reduce wages rather than
dismiss workers and cut taxes to promote job creation.
The country, in or close to recession for the past five
years and with an unemployment rate above 27 percent, should
also make its deficit-reduction programme more growth-friendly.
The IMF said while Spain would probably return to growth
later this year, weak activity would weigh on the banks, with
loan quality worsening and less credit flowing into the economy.
The challenge is somewhat similar in Ireland.
The second euro zone country to seek an EU-IMF rescue in
2010, after Greece, it has a good chance of exiting its 85
billion euro ($114 billion) bailout this year thanks to tight
budgets and restored growth, the IMF said.
In contrast to many euro zone peers, the Irish economy has
expanded for much of the last two years, and the Fund kept its
growth forecasts for 2013 and 2014 unchanged, at 1.1 percent and
2.2 percent respectively.
But, as in Spain, Ireland has still not restored its banks
to health, a task which could be made easier if Europe moves
quickly towards the creation of a full banking union.
Both countries agreed to a detailed review of their troubled
banks' loan books this year ahead of stress tests in 2014.
The IMF's Irish mission chief Craig Beaumont said the first
exercise was not expected to lead to a need for capital
injections. However, Spain's Economy Minister Luis de Guindos
said this week Spanish banks may need an extra 2 billion euros
of capital, which Madrid could cover without new EU money.
The Spanish government also insisted that the worst of the
economic crisis had passed, but higher debt costs and bad loan
rates in the banking sector cast doubt on that assertion.
The IMF's Spanish mission chief James Daniel said Spain's
banks should reinforce the quantity and quality of their capital
and quickly sell distressed assets, as non-performing loans are
likely to increase and weigh on their performance.
He also recommended regular and rigorous bank stress tests.
Both countries also face specific challenges: creating jobs
for Spain and regaining full market access for Ireland.
Unemployment has risen steadily across Europe as the
economic crisis has dragged on, and job creation will top the
agenda at a regional summit next week, with leaders meeting
again to discuss the issue in Berlin on July 3.
The IMF insisted Spain should amend last year's flagship
labour reform, something Prime Minister Mariano Rajoy has said
he unwilling to do. Rajoy has instead called for the European
Central Bank to take more measures to help reduce the high
borrowing costs faced by Spain's private sector.
The IMF backed this call on Wednesday and said the option of
an ECB bond-buying programme for Spain should be kept open.
Ireland, which has consistently hit targets set under its
bailout, came closer to weaning itself off emergency aid by
raising 5 billion euros with a 10-year bond sale in March.
Dublin is also considering whether to go it alone when it
comes off aid or take a precautionary credit line that could
smooth its bailout exit but bring political difficulties.
Beaumont said a decision on this would be taken in the autumn.