IMF urges 'comprehensive' reforms in Spain

The IMF warned Friday that Spain must implement comprehensive reforms to win back market confidence even after securing a huge rescue loan for its stricken banks. In a hard-hitting report less than a week after the eurozone agreed on a banking rescue of up to 100 billion euros ($125 billion) for Spanish banks, the International Monetary Fund listed a string of needed reforms. Among the hardest to digest: Raising value added tax (VAT) now -- a step the ruling Popular Party had promised not to take during its election campaign; Immediate legislation on future public wage cuts; Separating "non-viable banks" from those that need no aid and those that are viable but need support. The backdrop, it warned in an annual report on the Spanish economy, was grim. "Market confidence remains weak and the outlook is very difficult," the Fund said. Madrid had instructed banks exposed to the collapsed property market to strengthen balance sheets, restructured hardest hit Bankia, reformed labour rules and introduced new budget laws that include taking greater control over big-spending regions. Yet the markets had not been impressed. Spain's risk premium, the extra interest rate investors demand for its 10-year bonds over their safer German equivalent, hit 5.54 percentage points Friday, the highest since the 1999 birth of the eurozone. The nation's 10-year bond yields spiralled to 6.967 percent earlier in the week, another euro-era record. Recession was deepening, unemployment was at 24 percent and rising, and homes and businesses trying to shed debt would likely mean falling output this year and next, the IMF said. Consumption and investment should recover "modestly" if financing conditions stabilise and as labour market reforms kick in. But downside risks dominated, it said. The rescue loan reduced risks for now, but market tensions could intensify if Spain could not stop investors fleeing, or if there was stress "elsewhere in the euro area" it said, two days before Greece holds elections. Prime Minister Mariano Rajoy's government has insisted that the rescue loan imposes no new conditions for reform outside of the banking sector. But the IMF pressed for action in both areas. In the financial sector, non-viable banks must be separated from those that can be helped with the rescue money and those that need no help, it said. Bankia and other rescued banks must outline their restructuring plans and timetables, the IMF added, and there must be a plan to deal with real estate assets, whose value has plunged. But this must go along with "a comprehensive package of reforms in other areas". The Fund said Spain lost credibility by missing its target of cutting the public deficit to 6.0 percent of gross domestic product in 2011 -- it ended up at 8.9 percent. This was exacerbated, it said, by Spain's insisting that all was well until almost the end of the year. "Despite the considerable effort, the very ambitious 5.3 percent of GDP deficit target for 2012 will likely be missed," it said. IMF staff projected the deficit would "signficantly overshoot targets and fall only gradually over the medium term."