IMF: Spain's financial sector reform steadfast, challenges remain

The International Monetary Fund (IMF) said Monday that implementation of the financial sector program by the Spanish authorities has been "steadfast" with all the program's specific measures complete, but challenges still remain for the country's financial sector. These measures include identifying undercapitalized banks via a comprehensive asset quality review and independent stress test, and taking actions to address these shortfalls supported by funding from the European Stability Mechanism, the IMF said in a statement after a visit of its financial sector monitoring mission to Spain. An IMF staff team visited Madrid between Dec. 2 and 16 for the fifth and final independent monitoring mission in the context of the European financial assistance for bank recapitalization, as agreed with the Spanish authorities and the European Commission in July 2012. "Efforts under the program have made the banking system stronger, safer, and leaner, as has important policy progress at the European level. These developments have in turn supported financial stability and investor confidence -- key prerequisites for solid and sustainable growth," noted the statement. Despite the substantial progress and the recent stabilization of output, important challenges for the financial sector remain, as the economy continues to undergo a process of private-sector deleveraging and fiscal consolidation that can restrain the pace of recovery, with concomitant challenges for bank profitability, said the Washington-based global lender. At the Spanish level, priorities include continued pro-active monitoring and supervision, such as efforts to ensure adequate provisioning and to help prepare banks for the forthcoming European tests, said the IMF. At the euro-wide level, it added, priorities include further progress on banking union and continued monetary policy support to help reduce financial fragmentation, ease credit conditions, and assist the recovery. The IMF estimated in October an economic contraction of 1.3 percent for Spain this year, an improvement from its July projection of a decline of 1.6 percent.