Spain remains in “the danger zone” and must maintain momentum in restructuring its economy to keep contagion from Europe’s sovereign-debt crisis at bay, the International Monetary Fund said.
“The outlook is difficult and the risks elevated,” the Washington-based IMF said in a report after a visit by staff to Spain. “The policy agenda remains challenging and urgent -- there can be no let up in the reform momentum.”
The assessment coincides with Prime Minister Jose Luis Rodriguez Zapatero’s decision today to call early elections on Nov. 20 and Moody’s Investors Service’s warning that it may downgrade Spain’s debt rating. The euro-region’s fourth-biggest economy is trying to rein in surging borrowing costs that have pushed the yield on its 10-year bond above 6 percent, hindering efforts to stoke growth as unemployment stays above 20 percent.
“Many of the imbalances and structural weaknesses accumulated during the boom remain to be fully addressed,” the fund said. “Spain is not out of the danger zone.”
The report, a so-called article IV assessment, praised Spain for its “strong and wide-ranging” response to economic challenges in the last year. The country met its 2010 budget deficit target, forged ahead with efforts to curb the cost of its pension system and reshaped its banking industry by forcing lenders to meet minimum capital requirements, the IMF said.
Spain still needs to do more, the fund said. “Downside risks dominate” the outlook for economic growth in the near term because of rising concerns about sovereign risks in the euro area, according to the report.
The IMF said Spanish banks that need capital should raise it “promptly from the market” to help allay concerns about the health of the financial system. The Bank of Spain, which said in March that 12 lenders would need to raise 15 billion euros ($22 billion) to meet new capital requirements, said this month the process of recapitalizing the system is now almost complete.
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