ISSN 2330-717X

OECD Says Spain’s Immediate Economic Recovery ‘Remains Remote’

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The prospect of an immediate recovery for the Spanish economy remains remote, said Thursday the OECD in its Economic Survey of Spain 2012 report.

The OECD noted that Spain is immersed in a prolonged recession, in which “The depressing impact on activity of private sector deleveraging and the need for sizeable fiscal consolidation following the bust of the domestic credit boom has been compounded by the euro area debt crisis and structural rigidities in the labour market, resulting in a steep increase in unemployment and a banking crisis.”

Spain
Spain

According to the OECD, “The prospect of an immediate recovery remains remote as deleveraging of the private sector still has a long way to go while the feedback loop between government finances and the banking sector remains strong, notwithstanding the loan of up to EUR 100 billion from the euro area governments to recapitalise the banks.”

The OECD said not only must this feedback loop must be broken, but there must be further structural reforms to boost employment, notably among youth, and improve competitiveness, helping to reduce the current account deficit further.

“Given the major risks that have built up, decisive policy action on all these fronts is urgent if the situation is to be turned around,” the OECD warned.

The OECD did acknowledge that progress has been made in the comprehensive recognition of losses, which is key for restoring confidence in the banking sector.

“The government has taken an important step by tightening the provisioning rules on the banks’ real estate-related exposures,” said the OECD, but it added that “Rapid orderly resolution of non-viable banks and recapitalisation of viable banks with capital needs will be key, as planned in the Memorandum of Understanding with the European Union on a financial sector reform programme, which is a welcome framework.”

According to the OECD, the impaired housing-related assets need to be transferred to the planned asset management company at prices which are sufficiently low to limit risks for public finances.

Additionally, action needs to be taken to ensure that the substantial amounts of hybrid capital and debt buffers will share the burden of losses, especially when the holders of these instruments are institutional investors. Reform of bankruptcy procedures would help to shift resources from insolvent companies to productive use, the OECD noted.

Prior to releasing its report, the Secretary-General of the OECD, Ángel Gurría, was received at Moncloa Palace on Thursday morning by the Spanish Prime Minister, Mariano Rajoy.



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