IMF 'confident' on Spain's economy
Head of organisation says government's austerity measures "very effective".
Last Modified: 18 Jun 2010 16:12 GMT
Strauss-Khan, left, said he had 'huge confidence' in Spain's economy after the talks with Zapatero [AFP]

The head of the International Monetary Fund (IMF) has expressed confidence in the medium- and long-term prospects for the Spanish economy following talks with the country's prime minister in Madrid.

Dominique Strauss-Kahn met Jose Luis Rodriguez Zapatero in the Spanish capital on Friday to discuss the government's measures to convince financial markets that Spain's finances are under control.

The talks came at the end of a tumultuous week for Spain, marked by rumours that the EU and IMF were putting together a Greek-style bailout for the country.

However, a plan to convince sceptical markets that Spanish banks are sound and a successful auction of long-term government bonds on Thursday appear to have eased investor fears.

'Huge confidence'

Strauss-Kahn said that Zapatero's austerity measures, including spending cuts and reform of the labour market, were "very effective" and that he had "huge confidence" in Spain's economy.

Zapatero said that he had explained to the IMF chief the various measures that the government is taking.

"I conveyed to [Strauss-Kahn] the determination of the Spanish government to implement and to make effective every single one of these reforms that we have launched, to demonstrate that Spain can overcome the crisis and emerge with a stronger economy," he said.

Tim Friend, Al Jazeera's correspondent in Madrid, said it is "unlikely" that there will be civil unrest in Spain similar to that in Greece.

"There are distinct differences between the two countries: Greece essentially lied about its prospects and there was a lot of false data, Spain, however, is determined to have transparency," he said.

"Although it's a painful process, at least if they understand why this course is being taken then perhaps social unrest can be avoided.

"But that said, there is always the possibility that if things take a turn for the worst - and there is a lot of growing poverty here amongst people who've been directly affected by the recession - then it's always possible that will express itself in anger and violence on the streets.

"But I think it's unlikely we'll see a repetition of the sort of violence and indeed deaths that we've seen in Greece in Athens."

'Stress tests'

To calm market nerves about the strength of its financial institutions, Elena Salgado, the country's finance minister, said the Bank of Spain will publish "stress tests" on the ability of its banks to withstand any sudden financial shocks.

On Thursday, European leaders meeting in Brussels had also agreed to release the results of similar tests for their banks.

"By announcing its intention to publish the results, Spain has raised the stakes and the market expectations, now it will need to  show that it is up to the challenge," said Marco Annunziata, the chief economist at UniCredit Group.

On Wednesday, El Economista, a Spanish business newspaper, said the IMF, the EU and the US Treasury had drawn up a rescue plan for Spain, including a credit line of between $246bn and $307bn.

The EU, the IMF and the Spanish government strongly denied the reports.

At an EU summit in Brussels on Thursday, Zapatero slammed what he called "all these unfounded rumours" and Nicolas Sarkozy, the French president, offered his support when he said there was "no problem" with Spain's finances.

Bond sale

After Spain's public deficit ballooned to 11.2 per cent of gross domestic product last year, the Socialist government launched an austerity drive to slash the shortfall between revenues and spending to the eurozone limit of three per cent in 2013.

On Wednesday, the government also passed crucial reforms of the rigid job market, deemed essential for reviving the economy - but only after talks with the unions and employers broke down.

As a result, the country's two main unions have called a general strike for September 29 to protest against the plan, which they charged "will harm the rights of workers" and "delay the economic recovery".

In what markets took as a positive sign that the government is getting to grips with the crisis, the treasury on Thursday got through a critical loan test as a sale of debt bonds attracted strong demand.

Commenting on the sale, which raised a total of $4.3bn, Cyril Regnat, a bond strategist at French investment bank Natixis, said: "Spain has passed its test."

Al Jazeera and agencies
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