The International Monetary Fund backed Spain Friday in its fight to douse market alarm over the country’s deficit and banking system but said the government must show long-term commitment in enacting cutbacks.
“I am really confident in the medium and long-term prospects for the Spanish economy, providing the efforts that have to be made will be made,” IMF chief Dominique Strauss-Kahn said.
“And what I see today is that these efforts are underway,” he told a joint news conference with Spanish Prime Minister Jose Luis Rodriguez.
He was speaking after days of high market tension over Spain’s deficit and the banking system and after speculation, roundly denied, that Madrid may need a bailout.
A plan announced on Wednesday to convince sceptical markets that Spanish banks are sound, also later backed by EU leaders, and a successful auction of long-term government bonds on Thursday eased investor fears that the country was heading for a Greek-style financial crisis.
Spain plunged into its worst recession in decades at the end of 2008 following the collapse of a decade-long property boom and only returned to tepid growth this year.
The crisis has sent the unemployment rate soaring to more than 20 percent pushed the public deficit to 11.2 percent of gross domestic product last year.
The Socialist government launched an austerity drive to slash the shortfall between revenues and spending to the eurozone limit of three percent in 2013.
On Wednesday it also passed crucial reforms of the rigid job market, deemed essential for reviving the economy, despite a union call for a general strike.
“The decisions made by the Spanish government …are very welcome and will be very effective,” Strauss-Kahn said. “Of course, the result depends on the implementation.”
In the right direction
Strauss-Kahn said the the government is going “in the right direction” with the labour reforms.
“It’s amazing to see how unemployment has risen here in this country just when growth disappeared, much more than in other countries,” he said.
The IMF head said his talks with Zapatero had also ranged over “the political difficulties, because nobody can believe it is going to be easy, but also the commitment by the government to go forward.”
Zapatero said he conveyed to Strauss-Kahn “the determination of the Spanish government to implement and to make effective every single one of these reforms that we have launched, to demonstrate that Spain can overcome the crisis and emerge with a stronger economy.”
Markets were alarmed during the past week over possible strains in the Spanish banking system and rumours that Madrid plans to call on a special fund worth up to 500 billion euros to help eurozone nations that run into Greek-style deficit problems.
Officials deny reports
The EU, the IMF and the Spanish government strongly denied the reports.
Zapatero said he was “not too bothered about rumours. I’m worried that people actually believe these rumours. At the end of the day, the fundamentals are more important than rumours.”
To calm market nerves about the strength of its financial institutions, the Bank of Spain announced on Wednesday that it will publish “stress tests” on the ability of its banks to withstand any sudden financial shocks.
Germany has also decided to go public with analyses of their banks. And in Brussels, EU leaders on Thursday agreed to release the results of similar tests.
“The stress test is our response to get that confidence restored,” said Zapatero.
Strauss-Kahn described the tests as “absolutely crucial.”
“We shouldn’t forget that the crisis originated in the United States and originated in the financial sector, and so still there is some pressure on the financial sector,” he said.