The IMF urged Spain to enact speedy and far-reaching economic reforms, saying its recovery from financial crisis was weak so far, a report released on Monday said.
The Spanish government said it agreed with the findings, which were based on a periodic weeklong appraisal by the IMF called Article IV Consultation.
“The IMF’s situation analysis coincides with that made by the government,” the Spanish Finance Ministry said, adding that the Cabinet had passed measures last week that were broadly in line with the fund’s recommendations.
The IMF said Spain should urgently and radically reform its labor market while consolidating the banking sector “to cement the soundness and efficiency of the system.”
“The challenges are severe: A dysfunctional labor market, the deflating property bubble, a large fiscal deficit, heavy private sector and external indebtedness,” the report said.
It praised the country for taking “bold” measures that enhanced the country’s credibility, “such as cutting public sector wages.”
Last week, the government reduced civil servants’ salaries by an average of 5 percent in a bid to save 15.25 billion euros (US$18.81 billion) over two years and help bring the annual deficit back in line with the EU limit of 3 percent of gross domestic product by 2013. Last year’s deficit was 11.2 percent of GDP.
The report said Spain’s banking sector was sound, albeit “under pressure” and in need of consolidation.
Spain’s banking sector has largely weathered the financial crisis thanks to strict financial regulations that forced banks to set aside provisions during an economic boom fueled by construction and consumer spending.
Once banks accept funds from the Bank of Spain, they can be forced to merge with other more stable banks if their solvency continues to be in jeopardy.
Meanwhile, the IMF’s chief economist warned on Monday that markets would remain concerned until doubts over the EU delivering on its aid promise to the Greek government and Greece’s debt-payment history are resolved.
“The markets are wondering if Greece will be able to repay its debt or not,” Olivier Blanchard said in an interview to be published yesterday in La Tribune newspaper. “Given the behavior of Greek governments in the past, their uncertainties are understandable.”
There are also doubts about the EU’s ability to deliver the money it has promised to finance the Greek government and about the European Central Bank’s policies, Blanchard said.
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