Spain makes progress in crisis, huge reforms vital: OECD

PARIS: Spain has every chance of rising above its economic crisis if it enacts bold reforms, the OECD said on Monday, just as the government announced details of a pension overhaul, the latest in a series of steps over two weeks to regain market confidence.

Spain, in the eye of financial markets which are shunning its debt bonds, has done much right in fighting the crisis, but must reform its labour legislation and employment practices, the Organisation for Economic Cooperation and Development said.

The economy, which stalled in the third quarter after edging out of deep recession, is now set for subdued growth but the bursting of its property bubble will leave "lasting" scars and the unemployment rate, now about 20 percent, will remain among the highest in the European Union.

The OECD estimated "growth is expected to remain subdued owing to the necessary further adjustments in the housing sector and a high degree of private indebtedness. As a consequence, unemployment is expected to remain high."

This regular country assessment is likely to be read in particular detail on financial markets which see Portugal and Spain as being at high risk of eventually needing a debt rescue, as has already been the case for Greece and Ireland.

The sovereign debt crisis in the eurozone took a new turn at the end of the last week when European Union leaders agreed to adjust a basic treaty to create a permanent rescue fund, marking a small but important step towards new EU-eurozone architecture.

But several analysts said the leaders had again spoken too much in general terms, and not provided enough specific detail to reduce uncertainty for investors.

It was in this context that the OECD report on Spain referred to a problem of a lack of confidence undermining policies by the Spanish government to correct public finances.

While giving good marks to policymaking by the Spanish government, it warned that the crisis laid bare fundamental economic problems, estimating that more than half of the deterioration of public finances was structural and could be tackled only by reforms.

"The economy is slowly emerging from a deep recession, which will have a lasting effect," the OECD said.

"While fiscal and financial policies had been relatively prudent before the crisis, investor confidence declined during the crisis and this may weigh on the recovery as sovereign spreads remain high," it added.

This was a reference to the risk premium which Spain must pay to borrow, even though the European Central Bank has bought Spanish debt heavily to hold down the interest rates.

Madrid was forced to pay the highest rates since 2000 during a sale of 10-year and 15-year bonds on Thursday, a day after Moody's credit agency warned it may cut further Spain's sovereign debt rating from Aa1.

The Spanish government has announced austerity measures to cut its public deficit from 11.1 percent last year to 6.0 percent in 2011.

"While fiscal consolidation will put an additional drag on the recovery in the short term, it is crucial to improve confidence among domestic and international economic agents," said the OECD.

The OECD noted that the Spanish government had acted to reform the labour market, strengthen savings banks and improve competition in product markets.

But it concluded that "rebalancing the Spanish economy will require broadening and deepening the current policy efforts."

In particular, the OECD called "labour market reform is the cornerstone to rebalance the economy."

The government has announced in the past two weeks a number of further measures, including pension reforms and a new privatisation drive involving the sale of stakes in airports and the national lottery to raise funds.

There hyave been widespread protests against such measures.

On Monday, Labour Minister Valeriano Gomez announced details of pension reforms, including raising the retirement age by two years to 67 and extending from 15 years to at least 20 years the calculation base for benefits.

While there has been concern about Spanish banks given the bursting of the country's property market bubble, the OECD noted "the banking sector as a whole has withstood the crisis well, emerging from it with abundant capital and provision buffers, owing notably to prudent financial supervision."

Last week Moody's also reiterated its negative outlook on Spanish banks and warned that their total economic losses could reach 176 billion euros, of which the banks had so far recognised only 88 billion euros through write-downs and reserves.