Spain’s outlook is grim as economy faces mounting risks – IMF

27 July 2012 17:58  [Source: ICIS news]

WASHINGTON (ICIS)--The outlook for Spain is very difficult, the International Monetary Fund (IMF) said on Friday, noting that the country's already depressed economy will contract further this year and next, and faces increasing risks despite EU bail-out funding.

In its latest periodic review of Spain’s economy, the IMF said that the country “is facing mounting market pressure and costly market access, with  possibly negative repercussions for the rest of Europe”.

The “costly market access” refers to Spain’s 10-year government bond yield at 7.25% or higher, a level considered unsustainable.

That high cost for Madrid’s bonds is about the same range that triggered wholesale European rescues for both Ireland and Greece – and with the success of the Greek bailout still very much in doubt.

The Washington, DC-based IMF said further that Spain’s “economy is in the midst of an unprecedented double-dip recession with unemployment already unacceptably high, public debt increasing rapidly, and segments of the financial sector lacking capital and market access”.

Unemployment in Spain is said to be nearly 25% overall, with the jobless rate among the nation’s young adults perhaps twice that. Wide scale capital flight is said to be under way, with Spanish businesses and consumers spiriting funds out of the country in hopes of finding safe haven elsewhere.

“Headwinds from household and corporate deleveraging, combined with unavoidable fiscal consolidation and persistent capital outflows, will likely translate into output contractions this year and next,” the report said.

There appears to be little prospect of improvement for Spain’s economic morass; on the contrary, things are likely to get worse, the IMF said.

In its outlook analysis for Spain, the IMF report said that “downside risks dominate”, even after the €100bn ($123bn) bail-out package for Spanish banks approved by the 17 eurozone finance ministers last week.

“While the recently announced Euro area financial assistance for banks and the Euro area summit statement help to mitigate short-term risks,” said the IMF, “market tensions could intensify further, threatening market access, particularly if policies fail to stem capital outflows or due to further stress elsewhere in the Euro area.”

Amid ongoing and vehement demonstrations in Madrid and elsewhere against EU-mandated austerity measures, the IMF said that “market confidence remains week and the outlook is very difficult”.

There are strong doubts among economists that the EU nations, including notably reluctant Germany, could afford to mount a complete rescue for Spain, the fifth-largest economy in Europe with its recent gross domestic product (GDP) at nearly $1,500bn.

The still doubtful EU rescue of Greece, the 12th-largest European economy, had to deal with that nation’s far more modest annual GDP of $303bn.

The IMF was established in the closing days of World War II to promote international monetary co-operation and stability, foster economic growth and employment and to provide financial assistance to countries to help ease balance of payments problems.

Under its multinational mandate, the IMF periodically reviews the economic conditions and stability of its 188 member countries.

($1 = €0.81)

Paul Hodges studies key influences shaping the chemical industry in Chemicals and the Economy

By: Joe Kamalick
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