IMF issues warning for Spanish economy

| May 25, 2010 | 0 Comments
IMF issues warning for Spanish economy

The International Monetary Fund (IMF) has issued a severe warning to the Spanish economy suggesting it needs “far-reaching” reforms to ensure its recovery.

The economy, which is the euro zone’s fourth largest, exited recession in the first quarter of the year after experiencing growth of just 0.1% - ending a run of seven consecutive quarters of contraction.

There are concerns for the economy as unemployment remains with the jobless rate just over the 20% mark.

Spain’s jobless rate is double the 10% for the euro zone as a whole with the total number of jobless in the country at 4.61 million.

The economy has been hit by a severe slump within its key construction industry, which has led to a significant amount of job losses.

In a further blow to the economy, Spanish bank, CajaSur, was bailed out at the weekend.

The Bank of Spain has taken over the running of CajaSur after a proposed merger between CajaSur and savings bank, Unicaja, collapsed at the end of last week.

CajaSur, which is one of Spain’s largest regional lenders, was heavily exposed to Spain’s property market crash.

It had some €2.2 billion worth of troubled loans, according to analysts.

The news hit banking shares and there are now concerns among investors about the stability of the Spanish banking sector.

Last Friday, Spain’s Government passed the €15 billion (£13 billion) austerity plan, which has been implemented to deal with the country’s deficit, which is currently 11% of GDP.

Spain aims to reduce the deficit to 6% by 2011, which involves a 5% cut for civil servants.

The IMF, meanwhile, said: “The challenges are severe - a dysfunctional labour market, the deflating property bubble, a large fiscal deficit, heavy private sector and external indebtedness, anaemic productivity growth, weak competitiveness, and a banking sector with pockets of weakness.”

However, Spain’s Finance Minister Elena Salgado said: “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.”

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