BRUSSELS (MNI) – Strong exports could help lift economic growth in
Spain to 1.6% in 2012, but the Eurozone’s fourth largest economy faces
potentially severe risks, the International Monetary Fund said Friday.

Despite relatively positive developments, the economy still faces
significant risks of being engulfed by the Europe’s sovereign debt
crisis, the IMF warned in its annual Article IV review.

In the near term, financial conditions could deteriorate further,
reflecting rising concerns about sovereign risks in the euro area, it
warned.

While praising efforts by the current government to bring public
debt under control and strengthen the banking system, the Fund said that
more determined policy choices will be needed in the future.

Although Spain’s real financial exposure to Greece, Ireland and
Portugal is limited, the IMF warned that contagion may occur through
confidence effects that can affect perception of credit risk.

Spanish banks’ significant holdings of government’s debt could put
additional pressure on sovereign and bank funding costs for Spain, which
in turn could feed back to the real economy, said the report.

Spains financing needs also remain significant for the public
sector in coming months and for banks in early 2012, the report noted.

Spain is not yet out of the danger zone, said James Daniel, the
IMF’s top official for the country.

Moody’s has put the country’s debt rating on review and Spanish
Prime Minister Jose Luis Zapatero has called early elections for
November.

Should Spain be dragged into the Eurozone’s debt crisis, the effect
on the rest of the currency block would constitute a systemic event by
its magnitude, generating significant global ripples, said the IMF.

Bank exposures to Spain suggest that spillovers would be mainly
channeled by German and French banks, said the report.

While the Zapatero government has managed to bring down the public
sector deficit to 6% of GDP from 11% in 2009, there is still a long way
to go towards achieving fiscal balance by 2014, the IMF said.

Regional governments, which have authority over health and
education spending, may find consolidation difficult, as they have never
had to make such cuts in the past, it noted.

The IMF expects real GDP growth of 0.8% this year and said it could
rise to 1.6% in 2012, in line with the rest of the Eurozone, and to 1.8%
in 2013 and 1.9% in 2014.

Growth has picked up as strong exports outweighed weak domestic
demand, reducing the current account deficit, it noted.

Spain’s unemployment rate of 21%, however, remains unacceptably
high and the inflation rate of 3% is still above the Eurozone average,
the report said.

Labour market reforms, in particular, are needed to cut the
unemployment rate, which is roughly double the Eurozone average, said
the Fund.

The over-supplied housing market also remains a drag on the
economy, the IMF noted. House prices are down 12-26% from peak levels
and the stock of unsold new homes is estimated at 686,000 to 1.5 million
units.

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