IMF Executive Board Concludes 2012 Article IV Consultation with Spain

Public Information Notice (PIN) No. 12/87
July 27, 2012

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 2012 Article IV Consultation with Spain is also available.

On July 25, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Spain.1


The economy has entered an unprecedented double-dip recession with unemployment already very high and public debt increasing rapidly. On the positive side, imbalances are improving, especially the current account deficit, inflation, and unit labor costs, and deleveraging is underway. But market confidence remains weak. Spain has suffered a sharp reversal of private external financing flows in the second half of 2011 and early 2012. After an LTRO-induced respite, market tensions re-emerged in the spring. Yields and spreads on Spanish government bonds remain high and banks unable to tap private unsecured financing.

Many major policy actions have been taken in recent months on several fronts. On banks, provisions and capital requirements have been raised, independent valuations commissioned, and a backstop provided with support from Spain’s European partners. The key policies incorporated to accompany this backstop are: (1) identifying individual bank capital needs based on a comprehensive asset quality review and an independent bank-by-bank stress test; (2) recapitalizing, restructuring and/or resolving weak banks; (3) segregating legacy assets of weak banks into an asset management company; (4) burden sharing from hybrid/subordinated-debt holders in banks receiving

public capital; (5) strengthening supervision and regulation. The financial assistance will cover estimated capital requirements with an additional safety margin, estimated as summing up to €100 billion in total, to be disbursed in several tranches over the 18-month duration of the program.

On fiscal policy, the 2011 fiscal slippage was about 3 percent of GDP, much worse than expected, underlining the challenges of fiscal consolidation at all levels of government. The new government introduced a first package of measures in December, an ambitious 2012 budget was adopted in June, the fiscal framework was improved, and a scheme for clearing sub-national arrears was put in place. In July, the Council of the European Union recommended another year (until 2014) for Spain to reduce its deficit below 3 percent of GDP and loosened the targets for 2012–14. To help achieve the new targets, the government recently announced a series of measures—including increases in VAT and reductions in civil service remuneration and unemployment benefits. Regarding regional governments, the government initiated the first step in the warning process for several regions at risk of missing targets, monthly reporting from October, and a new funding mechanism.

On labor market policy, a profound labor reform was introduced in February with measures to reduce labor market duality (by lowering the dismissal costs of permanent workers for unfair dismissals) and wage rigidity and to increase firms’ internal inflexibility (by giving priority to firm level agreements over wider collective agreements).

Executive Board Assessment

Executive Directors commended the Spanish authorities for taking decisive actions on many fronts. Nevertheless, in light of the ongoing private sector’s deleveraging, heightened market tensions, fiscal retrenchment, and the high unemployment, Directors noted that the economic outlook remains very difficult and vulnerable to significant downside risks. Accordingly, they emphasized the critical importance of sustained efforts and a clear, credible medium-term strategy for fiscal consolidation, financial sector restructuring, and structural reforms. Directors agreed that the success of this strategy in restoring confidence, jobs, and growth depends critically also on progress at the European level in strengthening the currency union.

Directors commended the Spanish authorities for the measures taken to restructure the financial sector in a challenging environment. They welcomed the European financial assistance for the recapitalization of Spanish financial institutions and the accompanying policies, as well as the envisaged role of the Fund in monitoring progress. Directors stressed the need to continue providing official support for weak but viable banks, resolve non-viable banks, and implement a comprehensive strategy to deal with legacy assets. Further efforts are also needed to upgrade supervision, crisis management, and the resolution framework. Directors 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. Faster progress toward establishing a common supervisory mechanism for euro area banks would also boost market confidence.

Directors welcomed the new fiscal package that supports a smoother path of consolidation in the context of weaker growth, although a few saw scope for a less front-loaded adjustment. Directors urged the authorities to adhere strictly to the agreed fiscal path, stressing the need for a credible medium-term budget strategy to reduce deficits and safeguard debt sustainability, while protecting the most vulnerable. In this context, they called on the authorities to take additional measures as necessary, especially on the revenue side, as well as use the available tools to enhance fiscal discipline, particularly at the sub-national level. Directors welcomed significant progress in strengthening the fiscal framework and looked forward to further improvements.

Directors underlined the urgency of additional progress in boosting competitiveness and jobs, given the high level of unemployment in particular among the youth. They welcomed the recent labor market measures, aimed at reducing market duality and wage rigidity, and increasing firms’ internal flexibility. These efforts should be complemented with further steps to improve the product and service markets, and the business environment. More broadly, Directors encouraged a rapid implementation of the government’s structural reform agenda.

Spain: Selected Economic Indicators, 2007–2012


2007 2008 2009 2010 2011 2012 1/

Real economy (change in percent)


Real GDP

3.5 0.9 -3.7 -0.1 0.7 -1.7

Domestic demand

4.1 -0.5 -6.2 -1.0 -1.7 -4.1

Harmonized index of consumer prices (HICP)

2.8 4.1 -0.2 2.0 3.1 2.1

Unemployment rate (in percent)

8.3 11.3 18.0 20.1 21.7 24.9

Public finance (in percent of GDP)


General government balance

1.9 -4.2 -11.2 -9.3 -8.9 -6.3

General government structural balance

-1.1 -4.9 -9.3 -7.6 -7.6 -4.7

Primary Balance

3.5 -2.6 -9.4 -7.4 -6.4 -3.1

General government debt 2/

36.3 40.2 53.9 61.2 68.5 89.6

Interest rates (in percent)


Short term deposit rate

3.8 1.0 0.8 1.7 2.2 2.2

Government bond yield 3/

4.3 4.4 4.0 4.3 5.5 7.1

Balance of payments (in percent of GDP, unless otherwise


Trade balance (goods and services)

-6.5 -5.5 -1.6 -1.9 -0.5 1.6

Current account balance

-10.0 -9.6 -4.8 -4.5 -3.5 -1.8

Fund position (May 31, 2012)


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 (June 18, 2012)


Nominal effective rate (2005=100) 4/5/

101.6 104.1 104.7 102.6 102.6 100.5

Real effective rate (2005=100, ULC-based) 4/

108.9 113.9 110.3 107.2 106.2 101.8









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

1/ IMF staff projections, unless otherwise noted.

2/ While the Eurogroup’s commitment of up to €100 billion (9.4 percent of GDP) includes an additional safety margin, staff, to be prudent and pending further details on implementation, assumed this amount for its projections.

3/ Data refer to 10-year government bond yields. Data for 2012 are as of July 20, 2012

4/ Data from IMF, International Financial Statistics. Data for 2012 are as of May 2012.

5/ 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 summing up can be found here:


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