Photo: AP/Emilio Morenatti
A highly anticipated IMF report on Spain and its banking sector advocates euro-wide deposit insurance and Spanish austerity in order to restore the country to fiscal health.The fund advocates stronger action from EU leaders towards fiscal integration and banking union, seen as a positive step by investors towards a sustainable euro area. From the report:
There is an immediate need at the euro area level to ensure adequate bank funding and mitigate contagion. But a lasting resolution to the Euro area crisis will require a convincing and concerted move toward a complete and robust EMU. This requires a roadmap toward a banking union and fiscal integration. A clear commitment in this direction, in particular on area-wide deposit insurance and a bank resolution framework with common backstops, is essential to chart a credible path ahead.
At the same time, the IMF calls for Spain to raise taxes, cut public wages, and get rid of a reintroduced deduction for mortgage payments. The fund conceded that Spain will likely miss its 5.3 per cent deficit target this year, but pushed for the government to work hard to meet targets in the future.
The proscribed austerity is much harder to stomach than suggestions for a euro-wide deposit guarantee system. It is criticise Spain for excessive levels of public debt when its economy is failing and its public debt-to-GDP ratio is lower than Germany’s.
The fund also made a handful of recommendations for rescuing the Spanish banks:
The recent progress needs to be built upon to complete the restructuring. The IMF’s Financial Sector Stability Assessment identifies some key reform areas, many of which are along the lines envisaged by the government:
Independent valuation. The quality and transparency of the independent valuations and stress tests should be assured (the inclusion of staff of independent institutions to advise on the process is encouraging).
Triage. Banks should quickly be required to meet any resulting additional need for higher provisions and capital, drawing on the backstop as needed. Banks should be triaged into: (1) those that do not need support (2) viable banks that need government support, which will be provided subject to tightly-monitored restructuring plans, and (3) non-viable banks.
Dealing with intervened banks. The new management of the fourth largest bank should quickly present their detailed restructuring strategy and timetable. The strategy for the other intervened banks should be announced, including their restructuring plans and estimated cost of government support. Consideration should also be given to strengthening the state’s ability to manage its large stakes in a substantial share of
the banking system and to enhance its ability to eventually exit, and ideally profit, from such stakes.
Using the backstop. The exact cost to the government will depend on many factors, including the results of the valuation exercise, the costs of restructuring intervened banks, and the specific strategy adopted. Even if the cost were to reach the full Eurogroup commitment of €100 billion, this would remain manageable from a debt sustainability perspective, provided the envisaged fiscal adjustment is undertaken.
Legacy assets. A goal of dealing comprehensively with legacy real estate assets should be announced, with options to be developed and finalised after the independent valuations.
Finally, this is the abstract from the report:
Many major policy actions have been taken in recent months on several fronts. But market confidence remains weak and the outlook is very difficult. 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.