IMF visit fuels speculation on Spain bailout despite denials

16th June 2010, Comments 0 comments

The head of the International Monetary Fund will visit Spain after reports Madrid needs a bailout while the government bit the bullet and approved crucial reforms Wednesday of its rigid job market.

The cabinet agreed sweeping labour reforms, deemed crucial for reviving the economy and fending off a Greek-style debt crisis, despite a union call for a general strike against them.

The reforms -- which make it easier and cheaper for firms to fire workers -- must still be voted on by parliament where the government is seven seats short of a majority.

The assembly last month passed a 15-billion-euro (18.4-billion-dollar) government austerity package, which includes cuts to public workers' salaries, by just one vote.

Spain plunged into its worst recession in decades at the end of 2008 following the collapse of a decade-long property boom and only returned to a tepid growth this year.

The crisis has sent unemployment rate soaring to more than 20 percent, the highest in the European Union after Latvia.

The high unemployment has caused government spending on jobless benefits to skyrocket, pushing Spain's public deficit to 11.2 percent of Gross Domestic Product last year, the third highest in the eurozone after Greece and Ireland.

Spanish press reports said Wednesday the IMF was working with the European Union and Washington on a rescue plan for Spain worth up to 250 billion euros.

Business daily El Economista said the IMF, the EU and the US Treasury had drawn up a liquidity plan for Spain including a credit line of up between 200 and 250 billion euros.

The plan would use money from a special-purpose fund worth up to 500 billion euros put in place last month to help eurozone nations that run into Greek-style debt problems, it added.

The IMF, the European Commission and the Spanish government have denied any bailout is in the works, with Brussels dismissing the report as "rubbish."

But IMF chief Dominique Strauss-Kahn announced Wednesday he will visit Madrid this week to meet Spanish Prime Minister Jose Luis Rodriguez Zapatero, adding to speculation over a rescue package.

Strauss-Kahn stressed it would be a "working visit" and again dismissed the talk of a bailout for Spain.

EU finance ministers last week finalised the details of the 500 billion euros loan and guarantee fund, set up to calm investors who had switched attention to Spain and other weaker eurozone members after a 110-billion-euro Greek bailout was agreed with the EU and IMF.

The IMF warned last month that Spain's economy needed "far-reaching and comprehensive reforms" of its rigid labour market and banking sector if it wants to solve its huge debt and deficit problems.

Bank of Spain governor Miguel Fernandez Ordonez meanwhile also called for rapid implementation of restructuring measures, including those to "improve the competitiveness of the Spanish economy."

The government pushed ahead with its own version of the labour market reforms after talks between it and unions and employers collapsed last week.

Spain's two largest unions, the CCOO and the UGT which represent over two million workers, on Tuesday called for a general strike on September 29 to protest the plan.

Workers on full contracts are currently entitled to severance pay of as much as 45 days per year worked, one of the highest levels in Europe. Under the government reform, this would be reduced to 33 days for some contracts.

The plan also calls for the creation of a government-sponsored fund for each worker that could be used by firms to pay a portion of an employee's severance.

Many economists blame the high jobless rate on the high cost of firing workers in Spain, which makes employers reluctant to hire staff and encourages the use of temporary contracts that have few benefits and rights.

The government has also encouraged the rapid consolidation of the country's 45 regional savings banks to weather the country's uncertain economic outlook sparked by the collapse of the property sector.

But its public finances could be further strained after the Bank of Spain revealed Wednesday that these regional banks have requested around 11 billion euros from a state restructuring fund to carry out merger plans.

The banks had until Tuesday to request financing from the Fund for Orderly Bank Reconstruction (FROB), which was set up in June last year to help the struggling saving banks merge or restructure.

© 2010 AFP

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