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IMF sees deeper Spanish recession in 2012, 2013

PARIS — The International Monetary Fund warned Friday that the Spanish recession would be worse than initially expected, with a forecast contraction of 1.7 percent this year and of 1.2 percent in 2013.

In addition, the IMF said that worsening market tension could disrupt Spain’s ability to finance itself, despite a eurozone bailout agreed for Spanish banks and emergency financial reforms for the 17-nation bloc.

“Market tensions could intensify further, threatening market access, particularly if policies fail to stem capital outflows or due to further stress elsewhere in the euro area,” the IMF said in a report on the eurozone’s fourth biggest economy.

Spanish borrowing costs are close to the level at which Greece, Ireland and Portugal were forced to seek international bailouts, and eurozone leaders are pulling out all the stops to prevent Madrid from facing the same fate.

Meanwhile however, the IMF estimated that the Spanish public deficit would exceed the government’s target in 2012, and 2013 when it would be 5.9 percent of output, the fund forecast.

Eurozone countries are not supposed to have deficits of more than 3.0 percent of gross domestic product (GDP), but Spain’s was likely to be around 7.0 percent this year, the IMF warned.

The Spanish government currently aims for a 6.3 percent deficit in 2012 and 4.5 percent in 2013.

On June 29, European leaders agreed at an EU summit on financial reforms for the eurozone, including measures to recapitalise banks without adding to the debt load of host countries.

“Spain’s prospects for lowering borrowing costs would be critically helped by a timely implementation of the summit decisions and continued progress toward a banking and fiscal union at the European level,” the IMF said.

Economists warn Spain might need a full bailout on top of a 100 billion euro ($123 billion) credit line agreed for its banking sector, after its sovereign interest rates have spiked in recent weeks.

The government is fighting to cut its deficit even as the country is suffering a recession brought on by the 2008 collapse of a construction boom.

On Friday, the government ruled out the prospect of a full international bailout.

“There is not going to be a bailout and a bailout is not an option,” government spokeswoman Soraya Saenz de Santamaria told a news conference.