IMF praises Spanish reforms

Spain is a “completely different” case from the rest of the troubled eurozone periphery and is persuading investors that it has addressed its financial fragility, the International Monetary Fund says.

Presenting the fund’s twice-yearly global financial stability report, José Viñals, director of the monetary and capital markets division, added that, given a picture of improving global resilience, there was no need to revise its assumption that Ireland and Greece could avoid restructuring their debts.

However, the fund said many weaknesses remained in the financial system, in spite of the improved economic outlook.

The IMF joined a chorus of officials, particularly in Europe, insisting that Spanish banking and fiscal reforms distinguish it from the more troubled economies of Europe’s periphery.

Mr Viñals, a former deputy governor of the Bank of Spain, said: “The actions that have been taken in Spain recently have managed to decouple in the views of markets the fortunes of Spain relative to those of Portugal.”

The report highlighted falling credit default swap spreads on Spanish sovereign bonds since the new year, in contrast to spreads for Greece, Ireland and Portugal.

“We are talking about completely different cases. Policy action has been taken in the case of Spain,” Mr Viñals said.

The stability report did express concern about “challenges” for Spanish households, laden with debt after the housing bubble burst, but praised the country for its labour market and pension reforms and for “accelerating bank restructuring and putting in place a new bank recapitalisation programme”.

Eurozone banks need to address serious weaknesses in their funding, the report said, citing a $3,600bn “wall of maturing debt” coming due in the next two years across the globe, with Irish and German banks facing the greatest difficulties in rolling over funding.

European banks need more capital to regain access to funding markets and rely less on the European Central Bank. “It is ...  imperative that weak banks raise capital to avoid a pernicious cycle of deleveraging, weak credit growth and falling asset prices,” the IMF report warned.

Urgent steps needed to be taken to improve the health of the weakest banks, and some of these need to be “restructured or resolved”, it said. This implies that fresh injections of capital would be needed if countries wanted to avoid losses for bank creditors.

Mr Viñals said many advanced economies were “living dangerously” with continued high debt, and recommended action to reduce the burden, though not so quickly as to undermine economic recovery.

The IMF repeated its call for systemically important banks to amass larger capital buffers to protect themselves against losses and shortages in liquidity.

While advanced economies should seek to reduce high levels of government and household debt, emerging economies needed to “guard against risks of overheating and the build-up of financial imbalances”.

The IMF did not envisage an orderly deleveraging without continued government support but said in the medium term “public assistance needs to be withdrawn and effective market discipline re-established”.