IMF warns Spain against further fiscal stimulus

23rd April 2009, Comments 0 comments

The government’s ‘timely and substantial’ policies receive nod of approval from IMF, which warns against further fiscal stimulus measures unless the recession deepens.

MADRID – The International Monetary Fund Wednesday called on Spain to implement reforms to improve competitiveness if it is to avoid a prolonged period of slow growth and high unemployment.

It praised the Socialist government for its ‘timely and substantial’ policies aimed at cushioning the impact of the economic crisis, but warned against further fiscal stimulus measures unless the situation worsens.

The Spanish economy entered its first recession in 15 years at the end of 2008 as the global financial crisis accelerated a downturn that was already underway in its once-buoyant property sector.

The unemployment rate shot up to 15.5 percent in February, the highest level in the 27-nation European Union.

"With reduced funding for the large external deficit and housing boom, what started as a soft landing turned into an abrupt unwinding of imbalances," the report by the IMF's executive board said.

IMF "directors expected the downturn in 2009 to be substantial, driven by deleveraging in the private sector and weak external conditions.

Spain's fiscal efforts so far "need to be complemented by reforms to bolster competitiveness and to avoid a prolonged period of slow growth and high unemployment which would make returning to fiscal sustainability more difficult."

But it said that "given the projected increase in the public debt ratio and the possible need for assistance to banks, further fiscal stimulus measures should be considered only if warranted by a further worsening of the downturn.

"These measures should be well-targeted and aim at facilitating structural reforms."

In 2008, Socialist Prime Minister Jose Luis Rodriguez Zapatero unveiled a EUR-11-billion stimulus package, mostly aimed at public works.

He recently defended the government's plans for stimulus spending to revive the economy amid criticism from both the central bank and the conservative opposition Popular Party.

The Bank of Spain projects the level of public debt to rise sharply from 39 percent of GDP in 2008 to 60 percent in 2010 – the European Union's limit.

It also predicts the country will see a budget surplus equal to 8.3 percent of GDP in 2009 and 8.7 percent in 2010, even without any fresh spending plans.

The IMF also praised the strong regulatory policies that enabled Spanish banks to weather the downturn.

"Nevertheless, the challenge remains to assist banks through the very difficult operating environment, and to curtail the excessive reliance on wholesale funding" – big loans from financial institutions – it said.

The IMF said any adjustment in the housing sector "would take time" but welcomed the government's efforts to provide mortgage assistance to newly unemployed workers.

AFP / Expatica

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