Spain's economic crisis requires "far-reaching" reforms, IMF warns

May 24, 2010, 16:50 GMT

Madrid - Spain's economy faces 'severe' challenges which require 'far-reaching and comprehensive reforms,' the International Monetary Fund (IMF) said Monday in its annual review of the Spanish economy.

Prime Minister Jose Luis Rodriguez Zapatero's government recently announced a tough austerity package amid concern within the European Union that Spain could be heading for a Greek-style financial crisis.

The austerity programme foresees budget cuts of 15 billion euros (24 billion dollars) in 2010-11, including the first cuts in public sector salaries for decades, freezing retirement payments and trimming public investments.

The 'ambitious' measures enhanced Spain's financial credibility, the IMF said, but warned that they needed to be complemented with structural reforms.

These included a radical overhaul of the labour market to make it more flexible, as well as a 'bold' pension reform, the IMF advised.

The Spanish government is hoping to negotiate an agreement on a labour market reform this month. The government has also proposed pension reforms, including raising the retirement age from 65 to 67.

Spain's problems included a large fiscal deficit, heavy indebtedness, anaemic productivity growth and weak competitiveness, the IMF said.

Major problems also include an unemployment rate of about 20 per cent, the highest in Western Europe.

Spain's nascent recovery was likely to be 'weak and fragile,' the IMF said, predicting that growth would rise gradually to up to 2 per cent in the medium term.

The body described Spain's banking sector as being 'sound' but as remaining under pressure, with the risks focused mainly on savings banks.

The report was released after the Spanish central bank took over the running of the savings bank Cajasur, which ran losses of nearly 600 million euros in 2009. The bank's planned merger with another savings bank, Unicaja, also failed.