IMF to Spain: You’re Screwed

The International Monetary Fund (IMF) has published its preliminary findings following its meetings with Spanish officials. The outcome is neither unexpected nor good news for Spain.

First the IMF states the obvious:

The 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 needing recapitalization. This calls for a commensurately ambitious policy response and communicating it within a comprehensive medium-term strategy. This strategy should be based around concrete measures to deliver the needed medium-term fiscal consolidation, a roadmap for restructuring the weak segments of the financial sector, and structural reforms to boost growth. The prospective Euro area financial sector support is an important opportunity to implement such a strategy. Spain’s prospects will also be helped by further progress at the European level.

Here are the problems:

• Spain cannot meet its 2012 target of a 5.3% of GDP deficit due to revenue shortfalls, structural changes that are needed in the country’s regions, and a compressed timeframe due to the delay in passing a budget.
• No one believes that Spain can do what it says based on its failure to be honest about its 2011 budget woes.
• The banking system is in tatters and no bank can raise private funds despite the recent LTRO program and the $125 billion bailout.
• Unemployment stands at 24% for the entire population and above 50% for the young and deleveraging by Spanish citizens suggests that output will contract through 2013, meaning no or little job growth.

The IMF offers hope that successful labor reform, the bailout, and improved competitiveness “could lead to a significantly better medium-term outlook.” That assumes that Spain can somehow muddle through for another two or three years.

There’s nothing new in the IMF’s analysis of what’s wrong with Spain. But the solutions on offer are simply wishful thinking — and not very upbeat wishful thinking at that. Spain is essentially on its own now and there’s no evidence that the country will be able to stand by itself.

The IMF’s report is available here.

Paul Ausick