IMF warns Spain of 'underlying problems' in the economy

The IMF praised Spanish government's "strong and wide-ranging" response to its economic crisis Friday but warned that many of the underlying problems have not been fully addressed. It urged the Socialist government to strengthen reforms already underway, in particular concerning the labour market, and warned of the risk of contagion from the eurozone debt crisis. "Unwinding imbalances accumulated during the long boom and reallocating resources across sectors will take years and will require determined policy action," it said in a report. "And many of the underlying problems of the Spanish economy, especially weak productivity growth and a dysfunctional labor market, remain to be fully addressed." The bursting of the property market bubble and the international financial meltdown plunged Spain into recession in late 2008. The economy stabilised in 2010 and has shown slow growth in early 2011. The crisis sent the unemployment rate soaring to 21.29 percent in the first quarter of 2011. The rate eased to 20.98 percent in the second quarter, according to official data released Friday, but remained the highest in the European Union and among countries of the Organisation for Economic Cooperation and Development. Spain, with an economy the size of those of Greece, Ireland and Portugal combined, is now battling to convince markets that it should not be lumped together with the three lame ducks now under EU and IMF rescue programmes. The government has taken steps to strengthen bank balance sheets, cut state spending, raise the retirement age, liberalise the labour market and sell off assets in a bid to calm nervous markets. Its goal to is cut the annual public deficit from 9.24 percent of Gross Domestic Product in 2010 to 6.0 percent this year, and to a eurozone limit of 3.0 percent in 2013. "Spain?s policy response to its economic challenges over the last year has been strong and wide-ranging, helping strengthen market confidence," the International Monetary Fund said. "The economy is gradually recovering and the rebalancing is underway. Growth has picked up as strong exports outweighed weak domestic demand, reducing the current account deficit. "But unemployment remains unacceptably high, inflation is again above the euro area average and sovereign and bank funding costs remain elevated and volatile. "The recovery is likely to be modest and export-led, with significant downside risks dominating, especially that of further contagion from rising concerns about sovereign risks in the euro area." The IMF praised the restructuring underway in the troubled banking sector and the greater transparency it has brought. But it warned that "decisive implementation of the reform strategy for the financial sector is critical to allay lingering market concerns." It said this needs to be complemented by a "bold strengthening of labor market reforms to substantially reduce unemployment." The report was released as Moody's warned it planned to downgrade Spain's credit rating, currently at "Aa2", and that of four major banks and six of the country's 17 regions. Moody's said that the pressure on Madrid could be exacerbated by fears over the new European deal to rescue Greece, which had "created a precedent" by involving the private sector and signalled a growing risk for investors holding bonds in the fragile countries of the eurozone.