The International Monetary Fund urged Spain to enact speedy and far-reaching economic reforms, saying its recovery from financial crisis was weak so far, according to a report released Monday.
The Spanish government said it agreed with the findings, which were based on a periodic weeklong appraisal by the IMF called Article IV Consultation.
"The IMF's situation analysis coincides with that made by the government," the Finance Ministry said, adding that the Cabinet had passed measures last week that were broadly in line with the fund's recommendations.
The IMF said Spain should urgently and radically reform its labor market while consolidating the banking sector "to cement the soundness and efficiency of the system."
"The challenges are severe: a dysfunctional labor market, the deflating property bubble, a large fiscal deficit, heavy private sector and external indebtedness," the report said.
It praised the country for taking some "bold" measures that enhanced the country's credibility, "such as cutting public sector wages."
Last week, the government reduced civil servants' salaries by an average of 5 percent in a bid to save 15.25 billion euros ($18.81 billion) over two years and help bring the annual deficit back in line with the EU limit of 3 percent of gross domestic product by 2013. Last year's deficit was 11.2 percent of GDP.
The IMF report noted that output had stabilized as "imbalances accumulated during the long boom have begun to unwind." Competitiveness has improved, as productivity has risen and the core inflation differential turned negative.
The report also said Spain's banking sector was sound, albeit "under pressure" and in need of consolidation.
The Finance Ministry agreed, saying the government and conservative opposition had recently agreed on a restructuring path that would emphasize merging weak banks with stronger ones.
Spain's banking sector has largely weathered the financial crisis thanks to strict financial regulations that forced banks to set aside provisions during an economic boom fueled by construction and consumer spending.
Once banks accept funds from the Bank of Spain, they can be forced to merge with other more stable banks if their solvency continues to be in jeopardy.
The Bank of Spain bailed out Andalucian savings bank Cajasur over the weekend, after merger talks with Unicaja broke down. It was only the second Spanish bank bailed out by public money, after the Bank of Spain took control of Caja Castilla-La Mancha in March 2009.
The labor market is also in need of attention, the IMF said, calling unemployment in the country "structurally high and excessively cyclical." Spain has one of the highest jobless rates in Europe now at more than 20 percent, despite having been the continent's top job creator just two years ago.
The IMF suggested the work force should become more flexible, and the government should help relocate workers across sectors.
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