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IMF Sees ‘Considerable’ Risks in Spain Amid Debt Crisis

June 22, 2011

(Updates with bond yields in ninth paragraph.)

June 22 (Bloomberg) -- The International Monetary Fund said Spain must step up efforts to overhaul its economy as Europe’s sovereign-debt crisis threatens to damp growth.

“The repair of the economy is incomplete and risks are considerable,” the Washington-based IMF said in its annual appraisal of Spain yesterday. There must be “no let-up in the reform momentum” to bolster the recovery and reduce a 21 percent unemployment rate that is “unacceptably high,” the fund said.

Spain’s Socialist government is carrying out the deepest budget cuts in at least three decades while raising the retirement age and reducing firing costs. Prime Minister Jose Luis Rodriguez Zapatero overhauled wage-bargaining rules on June 10 in the latest step aimed at reining in borrowing costs that surged to the highest in a decade last week on mounting expectations of a Greek default.

“Financial conditions could deteriorate further, reflecting rising concerns about sovereign risks in the euro area,” the IMF said. “This could put additional pressure on sovereign and bank funding costs for Spain, which in turn could feed back to the real economy.”

The IMF called on the government, which has passed two labor overhauls in the past year, to make deeper changes to reduce the highest unemployment rate in Europe.

‘Underlying Problems’

“Some of the underlying problems of the Spanish economy, especially weak productivity growth and the dysfunctional labor market, remain to be fully addressed,” the IMF said. It called for “further enhancing the credibility of fiscal consolidation, completing financial-sector reform” and “boldly strengthening the reforms of the labor market.”

Finance Minister Elena Salgado said the IMF report is “extraordinarily positive.” The fund said that authorities “undertook a series of measures targeting the main economic problems facing the country.”

“I don’t see here that they are telling us that we have to make changes,” Salgado said in a telephone interview yesterday in Madrid. “The core of the labor reforms is in place already.”

Spain’s 10-year bond yield fell to 5.475 percent today, from 5.49 percent yesterday, narrowing the spread over equivalent German securities to 249 basis points from 251 basis points. That gap widened to as much as 282 basis points last week, approaching the euro-era high of 298 reached on Nov. 30.

‘Additional Measures’

The government has pledged to cut the budget deficit to 6 percent of gross domestic product this year and 3 percent in 2013 from 9.2 percent last year, with measures including public- sector wage cuts and a pension freeze. Meeting the medium-term targets “will likely require additional measures,” said the IMF, whose economic projections are less optimistic than the government’s.

Economic growth, led by exports, will rise “gradually” to 1.5 percent to 2 percent in the medium-term, the IMF said. The Spanish government forecasts growth of 1.3 percent this year, rising to 2.3 percent next year and 2.4 percent in 2013. Salgado said yesterday she is sticking to those forecasts and first- quarter GDP “doesn’t contradict” the estimates.

--Editors: Fergal O’Brien, Matthew Brockett

To contact the reporter on this story: Emma Ross-Thomas in Madrid at

To contact the editor responsible for this story: Craig Stirling at

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