IMF Says Spain Needs Reforms

May 25, 2010 Updated: May 25, 2010

GOTHENBURG, Sweden—The International Monetary Fund (IMF) warned on Monday that Spain urgently needs “far-reaching and comprehensive” reforms to come to terms with its economy burdened by poor public finances aggravated by the euro crisis.

Spain’s underlying problems are numerous and severe, making economic recovery “weak and fragile,” according to the IMF. In a nutshell, the whole economy, including the private sector, labor market, and the banking sector is full of weaknesses. Poor productivity and weak competitiveness will slow down recovery unless reforms are implemented immediately to overhaul the labor force and enhance growth.

With an unemployment rate reaching 20 percent, the government is being urged to take radical measures. High unemployment and poor investment will continue to hamper domestic demand. However, the weak euro could stimulate export and eventually help to improve production and growth.

Although the Spanish banking sector is basically sound, consolidation needs to speed up to reduce over-capacity and improve solidarity. One concern mentioned by the IMF is that a significant part of the banks´ assets are land, which is “particularly difficult to value.” Access to the credit market remains limited, which will reduce earnings.

Last Saturday, the Bank of Spain took control over saving bank CajaSur. The bank reported 114 million euro (US$140.4) in losses in the first quarter this year, following 596 million in losses in 2009. Spain’s property market collapse lies behind the shortfall.

However, CajaSur accounts for scarcely 0.6 percent of the assets of the Spanish banking system, and will not affect the banking system, according to the Bank of Spain.

Spain is one of the European Union countries most severely hit by the financial crisis that deflated its real estate bubble. It is now facing its worse recession in 60 years.