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18 June 2013

IMF: 2013 Article IV Consultation with Spain - Concluding Statement of the Mission


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IMF concluded that strong reform progress is helping stabilise the economy and external and fiscal imbalances are correcting rapidly. But unemployment remains unacceptably high and the outlook difficult. This calls for urgent action to generate growth and jobs, both by Spain and Europe.


Strong progress has been made on critical and difficult reforms since last year’s consultation. A major labour reform was instituted in July. Decisive action was taken to help clean up banks in the context of the ESM-supported financial sector programme. A wide range of fiscal measures were enacted, at all levels of government, and transparency was sharply upgraded. Product and service market reform advanced. European policies were also strengthened, in particular via the ECB’s OMT programme and steps to banking union. While there are signs the economic contraction may end soon, the outlook remains difficult. In our baseline scenario, we expect growth to start to turn positive later this year and to gradually pick up to around one per cent in the medium term, with limited gains in employment. The external sector will likely continue to be the bright spot, but probably not enough to generate sufficiently strong growth given weak domestic demand. An upside scenario similar to the government’s is certainly possible, especially in the medium term if the envisaged reforms are fully implemented by Spain and Europe. But there are also downside risks: private sector deleveraging could weigh more heavily on growth or financial market pressures intensify.

The banking system is now significantly stronger but risks remain. While the ESM-supported programme is helping tackle legacy risk from the real estate boom-bust, the macro downsides could trigger a negative feedback loop between credit and the economy, with deteriorating loan books and pressure on profits. This calls for proactive vigilance to protect the hard-won solvency of the system and to support credit. Priorities include continuing to: (1) reinforce the quality and quantity of capital, including by being very prudent on cash dividends; (2) clean up loan books and encourage prompt disposal of distressed assets, including by following up on the welcome initiative to clarify the classification of refinanced loans; and (3) remove any supply constraints, for example, by developing well-designed guarantee and risk-sharing schemes targeted at SMEs, following through on plans to enhance non-bank financing, lowering deposit rates, and clearing public sector arrears. These actions could be incentivised by swapping deferred tax assets for tax credits. Rigorous and regular forward-looking scenario exercises on bank resilience should guide supervisory action.

The required fiscal consolidation needs to be as gradual and growth-friendly as possible. Despite the substantial adjustment in 2012, the deficit is still very large and needs to be reduced further to ensure debt sustainability. But reducing it too quickly would hurt growth. The government’s new medium-term structural deficit reduction targets strike a reasonable balance between reducing the deficit and supporting growth. It will be crucial to detail how these targets will be achieved and to ensure the measures are permanent and as growth-friendly as possible. The nominal (and, if necessary, structural) targets should be flexible in the event growth falls short of the government’s projections—the more credible the consolidation plans, the more scope for flexibility on targets. Given the need to stabilise the economy and assuming the structural consolidation in train for 2013 is delivered, significant additional measures for 2013 are undesirable.

More should be done at the European level to ease Spain’s adjustment. Recent euro area actions have reduced tail-risks and financial market stress. Nevertheless, these initiatives have not been sufficient to reverse financial fragmentation, fix the broken transmission mechanism, and deliver higher growth and employment, neither for the euro area nor Spain. Of particular importance to Spain would be moving faster to full banking union, which would help break the sovereign/bank loop by allowing Spanish firms to compete for funds on their own merits rather than on their country of residence. Further ECB measures to reduce the much higher borrowing costs facing Spain’s private sector would also be important. Spain and the euro area should keep the option of an OMT-eligible programme open to help cement market confidence and lower yields.

Full press release



© International Monetary Fund


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