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FRANKFURT (MNI) – The recovery of the Spanish economy will be weak
and fragile and growth is not foreseen until 2011, the IMF staff said
Friday in its annual article IV review on the country.

The challenges the country faces will likely retard recovery and
make it “more fragile” than in the Eurozone as a whole, the staff added.

“The central scenario is one of a long and gradual adjustment of
the various imbalances in the economy,” the staff wrote in their report,
dated at the end of June.

The staff foresee real GDP declining this year by 0.4%, after a
3.6% drop last year. Real growth should return in 2011, but only by a
meager 0.6%, the staff argued. In 2012 and 2013, growth is expected to
be 1.7% and 1.9% respectively.

Price pressures are also expected to remain subdued; the staff sees
inflation at below 1.5% through 2013.

The country’s public deficit, a serious problem, is expected to be
9.3% this year, 7.0% next year, 6.6% in 2012 and 5.9% in 2013. The
projections are more pessimistic than those of the Spanish government,
which aim to hit 3.0%, the maximum deficit allowed under EU rules, by
2013

“Ambitious fiscal consolidation is underway,” the staff said, but
the plan “is based on potentially optimistic macroeconomic projections
and the achievement of the targets should be made more credible.”

Government debt is expected at 63.7% this year and will rise to
79.8% by 2013 and then 85% by 2015, the staff said. The government sees,
however, debt only hitting 70.5% by 2013.

Spain’s outlook is “particularly uncertain,” the staff cautioned.
On the upside, “household consumption could grow more rapidly,
reflecting rising confidence, and stronger growth in partner countries
and the weaker euro may induce faster export growth,” the staff
explained.

Downside risks include a stagnation of the domestic economy, as
well as the failure to implement necessary fiscal policy reforms or an
external shock “such as an intensification in the recent market stress
for peripheral euro area countries,” the staff said.

“If distress were to spread to Spain, given its systemic
importance, the impact on the rest of Europe, and indeed globally, could
be substantial,” the report cautioned.

“Notably, the average conditional probabilities of distress in
European sovereign debt markets, given distress in Spanish government
debt, are higher than those under Greek distress,” it added.

Spain’s precarious situation and the risk that its wobbling poses
to other Eurozone countries make it necessary that the country “get
ahead of markets” with a “pro-active, comprehensive, and credible
strategy” on deficit-cutting and structural reform.

“A bold pension reform, along the lines originally proposed by the
government, should be quickly adopted,” the staff urged.

The new labor market reform does have “many positive aspects”,
but there remains “scope for further strengthening,” the staff argued.

“The process of consolidating savings banks has accelerated as
staff had recommended,” the report said.

The staff also eyed the minority status of the current ruling
Socialist government as a possible challenge, reminding that the
government’s austerity package was only approved by one vote in May.

–Frankfurt bureau; +49-69-720142; frankfurt@marketnews.com

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