IMF puts Spain in same boat as bailout recipients

Fund issues warning over potential "lost generation"

Despite acknowledging that Spain appears to have differentiated itself from its fellow peripheral euro-zone countries in the wake of its reform drive, the International Monetary Fund on Thursday still lumped the country in with bailout recipients Greece, Ireland and Portugal under the heading EA4 (euro area four).

In a report on the economic recovery in Europe, the IMF predicts Spain will continue to lag behind the rest of the continent, maintaining its growth forecasts for the country of 0.8 percent this year and 1.6 percent in 2012, compared with 1.6 and 1.8 percent respectively for the euro zone.

"For Germany, the worst of the crisis seems to be over and domestic demand is set to expand. At the other end of the spectrum, the adjustment in Spain still has a long way to go," the report said.

The IMF expects the ongoing drop in house prices after the property-bubble burst to depress consumer spending, while investment is also expected to be dampened by the weak outlook for the economy. "Spain continues to experience a significant housing-market contraction that will hinder consumption in the near term," the report said.

On a more positive note, the IMF highlighted the fact that along with Ireland and Britain, Spain had "moved ahead" in strengthening its banking systems. The Bank of Spain pushed the country's savings banks into a wave of consolidation that has greatly reduced the number of players in the sector. It has also raised the minimum core capital ratio from 6 to 8 percent, and to 10 percent in the case of unlisted lenders.

The report notes a "strengthening of national reforms" that allowed Spain to "decouple from other periphery countries in early 2011," but questioned whether the government would meet its deficit reduction targets for this year and the next. Specifically, the IMF sees the shortfall in Spain's finances narrowing from 9.2 percent of GDP in 2010 to 6.2 percent this year and 5.6 percent next year, compared with the administration's goal of a deficit of 6 percent in 2011 and 4.4 percent in 2012.

The IMF, however, leaves the bleakest aspect of its take on Spain to the labor market, where over a fifth of the working population is out of a job, with the situation particularly dire for young people. "In extreme cases like Spain's, close to one young worker out of every two is now out of work, raising the specter of a lost generation," the report says.

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