FRANKFURT (MNI) – Spain’s economy will contract by 1.7% this year,
the International Monetary Fund predicted Friday, warning of
“significant downside risks”.

In its annual Article IV review, the IMF revised down its GDP
forecast from last month for a 1.5% annual GDP decline. The Bank of
Spain recently estimated the GDP contraction in 2Q at 0.4% after -0.3%
in 1Q.

The IMF also cut its GDP forecast for next year to -1.2% from -0.6%
to take account of Madrid’s latest fiscal package, which would have “a
significant impact on growth, especially in 2013.” Still, implementing
reforms remains key for Spain to regain market confidence, it said.

“Obviously there’s still significant market stress,” said IMF
Mission Chief James Daniel in a conference call with reporters. The
report’s “core message,” he said, is that “Spain needs to implement the
reforms now.”

The IMF Executive Board’s statement on the staff review warned that
Spain’s “economic outlook remains very difficult and vulnerable to
significant downside risks.”

The board also welcomed Madrid’s newly proposed fiscal package and
the European aid package for Spanish banks, stressing the need for
“sustained efforts and a clear, credible medium-term strategy for fiscal
consolidation, financial sector restructuring, and structural reforms.”

The success of Spain’s reforms “depends critically” on the
Eurozone’s progress in strengthening its monetary union, the IMF said.
“Faster progress toward establishing a common supervisory mechanism for
euro area banks would also boost market confidence.”

Daniel repeated the IMF’s line that the ECB needs “to play a
pro-active role” in calming the situation in Eurozone. The IMF has
repeatedly called for more conventional and unconventional monetary
policy support from the ECB.

The Executive Board “considered that allowing direct
recapitalization for Spanish banks through the European Stability
Mechanism would help break the adverse feedback loops between the
sovereign and banks, and have positive spillover effects for the wider
euro area.”

The board urged Spain to differentiate among banks in order to
overcome the crisis over the long term. It should “continue providing
official support for weak but viable banks, resolve non-viable banks,
and implement a comprehensive strategy to deal with legacy assets.”

The IMF revised up this year’s inflation forecast to 2.1% from 1.9%
predicted in April. It revised up slightly its unemployment rate
forecast to 24.9% from 24.2%.

The board “underlined the urgency of additional progress in
boosting competitiveness and jobs” and welcomed recent labor market
reforms that should improve companies’ hiring flexibility.

The labor reforms “should be complemented with further steps to
improve the product and service markets and the business environment,”
the IMF said. “More broadly, directors encouraged a rapid implementation
of the government’s structural reform agenda.”

— Frankfurt bureau: +49 69 720 142; email: ccermak@marketnews.com —

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