IMF warns on weak Spanish growth, Madrid takes more measures

24th May 2010, Comments 0 comments

The IMF warned Monday that Spain's economic recovery will be "weak and fragile," with urgent labour and bank reforms needed, as the government took another step to rein in its public deficit amid a mounting European debt crisis.

"The challenges are severe -- a dysfunctional labor market, the deflating property bubble, a large fiscal deficit, heavy private sector and external indebtedness, anemic productivity growth, weak competitiveness, and a banking sector with pockets of weakness," the Washington-based IMF said.

Over the weekend, the Bank of Spain took control of its second troubled regional savings bank since the start of the global financial crisis in late 2008, stoking fresh concerns over the scale of the debt problem.

The Bank of Spain said Monday that Cajasur, based in the southern city of Cordoba and controlled by the Roman Catholic Church, would get an injection of "at least" 523 million euros (657 million dollars) to ensure its survival.

But business newspaper Expansion, said as much as 2.7 billion euros may be needed to clean up the bank's 1.5 billion euros in doubtful debt and cover another 364 million euros in bad loans and the depreciation of property assets.

Finance Minister Elena Salgado said the government did not have an estimate for how much the rescue of CajaSur will ultimately cost, saying only that it was up to the managers appointed by the Bank of Spain to make an evaluation.

But she said CajaSur, which has 486 branches and assets of 19 billion euros, would be sold in a "competitive process" to ensure that the rescue operation "has the lowest possible cost to taxpayers."

"Our financial system is absolutely solvent. You can't say it is at risk because of an institution as small as CajaSur but obviously it was important to send a signal of strength, of control, of solvency," she told news radio Cadena Ser.

The bailout comes as Spain is under pressure to take action from both its EU partners and from the markets, which fear Spain could follow Greece -- Athens needed an unprecedented 110-billion-euro bailout by the EU and the IMF earlier this month to save it from bankruptcy

The Spanish government said Monday it plans to bar local authorities from obtaining long-term credit in any form to fund their investments until the end of 2011 in a new move to bolster the public finances.

The measure is part of a two-year 15-billion-euro (19-billion-dollar) deficit-slashing plan announced earlier this month that includes a freeze on state pensions and an average five percent pay cut for civil servants.

As the eurozone crisis has unfolded, there have been concerns that local government debt could prove at least as big a problem as central government debt as governments try to put their public finances in order.

Eight out of Spain's 52 provincial capitals now owe on average more than 1,000 euros per inhabitant as municipalities struggle with falling revenues from property sales due to the collapse of a real estate bubble, official figures showed last month.

International ratings agency Standard and Poor's warned Spain last week that the nation's powerful regional governments face worsening deficits.

It predicted Spain's regional debt burden could surpass 110 percent of consolidated operating revenues in 2012, up from just 40 percent in 2007.

The debt of Spain's local authorities at end-2009 was 34.6 billion euros, equivalent to 3.3 percent of Gross Domestic Product, according to the finance ministry.

The latest austerity measures are on top of a 50-billion-euro package announced in January designed to slash the public deficit to the eurozone limit of three percent of GDP by 2013 from 11.2 percent last year.

© 2010 AFP

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