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Spain bank clean-up at 'advanced stage'

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WASHINGTON, Feb 4 AFP

February 05 2013, 02:48AM

The International Monetary Fund (IMF) says Spain's reforms under its financial sector support program are close to being complete and the clean-up of its weakest banks is well advanced.

"The program remains on track: the clean-up of undercapitalised banks has reached an advanced stage, and key reforms of Spain's financial sector framework have been either adopted or designed," the IMF said on Monday.

In a monitoring mission report, the IMF said most of the measures required of Spain under the European Commission's 100 billion euro ($A132 billion) support program for its devastated banking sector have been completed.

"This clean-up is a major achievement that should strengthen confidence in the system and improve its ability to support the real economy," the Fund said.

But the IMF, which was recruited to monitor progress of the EC program, which was launched last July, warned that remaining elements of the recapitalisation program need to be completed, "and in ways that minimise taxpayer costs".

"Going forward, it will be important to maintain this momentum with strong completion of initiated reforms and continued vigilant oversight."

The Fund warned that the financial system was still exposed to important risks while the economy remains weak and the government undertakes more austerity efforts to close its deficit.

In January the Bank of Spain said the country's banks, ravaged by a collapse of the property sector, held 191.6 billion euros worth of bad or doubtful loans, nearly 11.4 per cent of all credit extended.

The IMF cited also the "important progress" that came with the set-up of SAREB, the recently formed 'bad bank' that will take on the lenders' soured assets.

SAREB has already taken in real estate assets from the weakest Spanish banks, but the IMF said it still needed a comprehensive long-term business plan as well as firm implementation of its standards for servicing the bad loans, so that its own capital remains strong.

The IMF report came as Spanish Prime Minister Mariano Rajoy was under fresh pressure to resign over corruption allegations levelled at his ruling Popular Party.

The scandal has infuriated Spaniards, millions of whom are still struggling to find work in an ongoing recession with the highest jobless rate, at 26 per cent, since the return of democracy in 1975.

By Paul Handley