IMF Executive Board Concludes 2010 Article IV Consultation with Spain

Public Information Notice (PIN) No. 10/106
July 30, 2010

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2010 Article IV Consultation with Spain is also available.

On July 14, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Spain.1


After 15 years of strong growth led by a housing boom, the Spanish economy has entered a sharp downturn in the wake of the global financial crisis since mid-2007. Output fell sharply, driven by sharp declines in investment, exports, and private consumption, while weaker imports and rising government demand provided some offset. Imbalances accumulated during the long boom have begun to unwind, with the current account deficit halving as private savings surged and housing investment fell. Competitiveness has begun to improve as productivity rose and the core inflation differential with the euro area turned negative. However, the crisis has taken a heavy toll on the labor market, with the unemployment soaring to 20 percent, reflecting wage and working hour rigidities, the large share of temporary workers and the real estate bust. A labor market reform was adopted in June 2010.

The general government deficit swung from a surplus of 2 percent of GDP in 2007 to a deficit of 11.2 percent of GDP in 2009, due to the large stimulus and evaporating cyclical and one-off revenues. The debt ratio increased significantly – though from a low level. Fiscal consolidation is underway, including with a range of measures taken in

2010, aimed at achieving the government’s deficit target of 3 percent of GDP by 2013 (which has also been agreed with sub-national governments).

Spanish banks overall report robust capital and provision buffers, supported by a strong supervisory framework. However, risks remain substantial and unevenly distributed across institutions. The authorities have put in place a range of measures to support banks, including the Fund for Orderly Bank Restructuring (Fondo de Reestructuración Ordenada Bancaria—FROB) that supports the consolidation and recapitalization of the sector by providing temporary capital assistance to merging credit institutions. The process of consolidating savings banks has accelerated – as of end-June 2010, 12 merger/integrations were underway, comprising 92 percent of the assets of the savings bank sector. Governor Ordóñez also announced in mid-June the Bank of Spain’s intention to publish bank-by-bank results of stress tests. A decree reforming the regulatory framework of savings banks was approved by the government on July 9, 2010.

Executive Board Assessment

Executive Directors noted that the necessary adjustment of the economy is underway as imbalances accumulated during the long boom years have begun to unwind, and that output has stabilized. The growth outlook, however, remains uncertain owing to unstable financial market conditions and weak domestic demand.

Directors welcomed the authorities’ decisive policy response to the financial market turbulence and recent reform measures to secure market confidence and foster the smooth rebalancing of the economy. They noted that the Spanish authorities have undertaken significant corrective measures since the staff report was issued. They stressed that continued action will be needed on several policy fronts, including: (i) moving ahead with fiscal consolidation and pension reform, to put public finances on a sustainable footing; (ii) strengthening the recent labor market reform, to promote employment and its reallocation across sectors; and (iii) and following through on banking sector reform, to cement the soundness and efficiency of the system. Directors emphasized that these actions will help to contain the heightened risks faced by Spain, and to avoid the heavy costs for Spain and other countries should these risks materialize. Directors agreed that the successful implementation of such a far-reaching reform strategy will require broad political and social support.

Directors endorsed the ambitious fiscal consolidation underway. They welcomed the wide range of concrete and bold measures adopted and considered the envisaged deficit path to be appropriately front-loaded. Directors stressed that, owing to the considerable uncertainty associated with the macroeconomic projections, additional measures should be prepared if needed to make attaining the targets more credible. Directors underscored the need for a bold pension reform to complement fiscal consolidation and recommended strengthening compliance mechanisms.

Directors welcomed the recent labor market reform and encouraged further efforts to make the labor market more flexible and competitive. They broadly agreed that severance payments should be reduced to at least EU average levels and that this should be complemented by further clarifying the conditions for fair dismissals, decentralizing the wage setting process, and eliminating wage indexation.

Directors noted that the banking sector remains sound, but faces elevated and unevenly distributed risks. They welcomed recent consolidation of savings banks and the reform of their regulatory regime. They also welcomed the authorities’ announcement of their intention to publish bank-by-bank stress tests results, noting that it will be important for these tests to be based on realistic assumptions and accompanied by a clear strategy for addressing capital shortfalls faced by any institutions.

Directors commended the considerable progress achieved in recent years on product and service market reform. They agreed that, going forward, the main priorities should be to further reduce restrictions on retail trade, professional services, and the rental market.

Spain: Selected Economic Indicators, 2005–10

  2005 2006 2007 2008 2009 2010 1/


Real economy (change in percent)


Real GDP

3.6 4.0 3.6 0.9 -3.6 -0.4

Domestic demand

5.1 5.2 4.2 -0.5 -6.0 -1.5

Harmonized index of consumer prices (HICP)

3.4 3.6 2.8 4.1 -0.3 1.4

Unemployment rate (in percent)

9.2 8.5 8.3 11.3 18.0 19.3

Public Finance (in percent of GDP)


General government balance

1.0 2.0 1.9 -4.1 -11.2 -9.3

General government structural balance

-1.6 -1.2 -1.1 -4.8 -9.3 -7.8

Primary balance

2.8 3.7 3.5 -2.5 -9.4 -7.1

General government debt

43.0 39.6 36.1 39.7 53.2 63.7

Interest rates (in percent)


Money market rate

2.2 3.1 4.3 4.6 1.2 0.8

Government bond yield

3.4 3.8 4.3 4.4 4.0 4.0

Balance of payments (in percent of GDP, unless otherwise noted)


Trade balance (goods and services)

-5.1 -6.2 -6.5 -5.6 -1.8 -1.3

Current account balance

-7.4 -9.0 -10.0 -9.7 -5.4 -4.9

Fund position (April 30, 2010)


Holdings of currency (percent of quota)


Holdings of SDRs (percent of allocation)


Quota (millions of SDRs)


Exchange rate


Exchange rate regime


Euro Area Member


Euro per U.S. dollar (July 14, 2010)


Nominal effective rate (2000=100) 2/ 3/

106.3 106.5 108.1 110.5 110.7 108.7

Real effective rate (2000=100) 2/

119.1 122.4 126.4 134.7 135.2 133.4

Sources: Bank of Spain; National Institute of Statistics (INE); Eurostat; and IMF staff estimates.

1/ Staff projections, unless otherwise noted.

2/ Data from IMF, International Financial Statistics.

3/ Corresponding to the ULC-based real effective rate.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:


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