Spain PM brushes off IMF austerity advice for now

AP News
Posted: Jun 16, 2012 3:40 PM
Spain PM brushes off IMF austerity advice for now

Spain will not immediately implement the International Monetary Fund's latest recommendations, which include cutting government workers' wages further, because they are nonbinding advice, the prime minister said Saturday.

The IMF is one of three organizations Mariano Rajoy's government turned to for an assessment of the state of Spain's banking sector ahead of a (EURO)100 billion ($125 billion) bailout for failing lenders.

The latest IMF document, released Friday, was not part of a bank sector report, but one of regular economic analyses issued on the state of Spain's economy. It was critical of how the country had missed its deficit reduction target in 2011, despite insisting "until almost the end of the year that the deficit was on track."

Spain's deficit for 2011 had to be revised upward twice to finish at 8.9 percent of economic output, instead of the 3 percent maximum level set by the European Union.

Rajoy has set a goal of reducing the deficit to 5.3 percent of GDP in 2012. The IMF report called that goal "very ambitious" and said it would "likely be missed."

Rajoy said the IMF proposals, contained in the Friday report, were only suggestions and he would not implement them for now.

Meanwhile, several thousand demonstrators marched late Saturday in at least three Spanish cities to protest what they said was disgraceful mismanagement of banks that had left them on the verge of bankruptcy.

In Madrid the protesters gathered outside the headquarters Bankia SA, a bank that has requested euro19 billion ($23.9 billion) in state aid and has euro32 billion ($40.3 billion) in toxic assets on its books.

Bankia is one of five domestic Spanish banks assessed by the IMF in its June 9 financial stability report as having heavy exposure to corporate and retail real estate lending.

In Friday's report, the IMF also suggested that Rajoy's government increase value-added tax _ or VAT, a type of sales tax _ and eliminate a recently re-introduced deduction on mortgage payments for first-time homebuyers. The previous Socialist government boosted VAT to 18 percent and also reduced public sector pay by 5 percent in 2010.

Rajoy has since frozen wages but resisted cutting them and hiking sales tax, as the economy enters a double-dip recession.

Rajoy said that the most important item on Europe's political agenda is to reinforce the single currency's image.

"Europe has to transmit a message to the world making it clear that the euro is an irreversible project," Rajoy said.