Updated on
Summary The Spanish economy may become the next target of worsening economic crisis in Europe.
According to International Monetary Fund (IMF), Spain is still in “the danger zone” and must keep up momentum in restructuring its economy to stave off contagion from Europe’s sovereign-debt crisis.“The outlook is difficult and the risks elevated,” the 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 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 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.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 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.The IMF said that in terms of Spain’s efforts to cut its budget deficit, the “larger risk” to the 2011 target is that some regional governments may not keep to spending limits.Meanwhile, Spain should make an early commitment to balancing its books over the medium-term, while meeting medium- term fiscal requirements “will likely require further action,” the IMF said.The fund’s staff predict the deficit will narrow to 4 percent of gross domestic product by 2014. Taking into account the risk of a potentially weaker outlook and the possibility that the regions will miss their targets, additional measures of about 2 percent of GDP would be needed to reach the government’s goals, the IMF said.In its report, the fund maintained its predictions for Spain’s economic growth, forecasting expansion of 0.8 percent in 2011 and 1.6 percent next year.
