Spain in 'Danger Zone' on Europe Crisis: 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 International Monetary Fund said.

“The outlook is difficult and the risks elevated,” the Washington-based IMF said in a report yesterday 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 coincided with Prime Minister Jose Luis Rodriguez Zapatero’s decision the same day to call early elections on November 20 and Moody’s Investors Service’s warning that it may downgrade Spain. 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 six per cent, hindering efforts to stoke growth as unemployment stays above 20 per cent.

“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” and “scenarios of negative spillovers from Spain indicate a substantial impact on the rest of Europe and indeed globally, given the country’s systemic importance.”

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.

‘POTENTIALLY SEVERE’
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.

“Risks are tilted to the downside and potentially severe,” the fund said.