Recession will see Spain miss deficit goals, says IMF

The International Monetary Fund on Tuesday predicted Spain would fall way short of its deficit reduction targets, just hours after the government reiterated its determination to meet the goals despite an impending recession.

In the latest update of its World Economic Outlook report, the IMF concurred with the government's estimate for the shortfall in its finances for last year of eight percent of GDP, two percentage points above target. But for this year, it predicted a deficit of 6.8 percent, well above the government's goal of 4.4 percent. For 2013 it sees a slight fall to 6.3 percent, well off the three percent pledged by Spain to Brussels.

Speaking earlier to reporters, after a meeting of European Union finance ministers in Brussels but prior to the release of the IMF report, Spanish Economy Minister Luis de Guindos said: "The government's current deficit objective is 4.4 percent of GDP and there has been no change in that respect."

Finance Minister Cristóbal Montoro last weekend suggested the European Commission could allow Spain to delay meeting the target by a year. Asked if Spain would request an extension of the deficit-reduction deadlines, De Guindos replied: "That is absolutely not on the agenda at this time."

The Bank of Spain on Monday predicted the Spanish economy would shrink 1.5 percent this year. The IMF confirmed a report last week that Spain's GDP would shrink 1.7 percent this year and 0.3 percent in 2013. The IMF also lowered its growth forecasts for the global economy and predicted output in the euro zone would shrink by 0.5 percent after estimating growth of 1.1 percent in its September report. "The outlook for growth is mediocre, and it could be worse," Blanchard said.

De Guindos said the IMF was "not taking into consideration the determination and fiscal effort the Spanish government will carry out."

"Not all countries should adjust in the same way, to the same extent, or at the same time, lest their efforts become self-defeating," the IMF report said. "This is a marathon, not a sprint," the IMF's chief economist Olivier Blanchard told a news conference in Washington.

The head of the IMF's fiscal affairs department, Carlo Cottarelli, said while fiscal adjustment in countries such as Spain and Italy was necessary, the markets also get worried when there is no growth.

The European commissioner for economic affairs, Olli Rehn, rejected the idea of giving Spain more time to fulfill its deficit goals because this could aggravate doubts about the Spanish economy.

"Our European partners clearly value the fiscal consolidation efforts of the Spanish government," De Guindos said. "This is the main contribution that Spain can make from the point of view of stability and the generation of confidence in the European environment."

As a result of its failure to meet its deficit targets, the IMF predicted Spain's outstanding public debt would grow to 84 percent of GDP in 2013 from 70 percent last year.

De Guindos also ruled out Spain having to follow Greece, Portugal and Ireland in seeking a bailout from the IMF and the EU. The IMF's managing director, Christine Lagarde, on Monday warned of the risk of a "solvency" crisis for Spain and Italy if the EU does not strengthen its rescue funds for the euro zone.

"Spain doesn't have any sort of liquidity problem at the moment nor a solvency problem," De Guindos said. "Spain is a solvent country. If we carry out the economic reforms we are planning and complete our budget adjustment plan, you should not have the least doubt that Spain will not need to be rescued by the IMF."

De Guindos said overhauling Spain's dysfunctional labor market was a "very important priority" for the government. "The Commission, our partners in the euro zone, are asking Spain to make an effort in the area of labor reform," the minister said. "The reforms carried out so far have failed, as is evident in the [unemployment] figures we have."

Spain's jobless rate stands at 21.5 percent, more than double the average in the EU. The Bank of Spain on Monday predicted it would rise to over 23 percent this year and the next.

De Guindos said the government would also push ahead with the restructuring of the financial sector. "A new round of consolidation is needed, that is, bigger, more healthy banks with better corporate management."