Spain's financial sector reform remains on track

The International Monetary Fund (IMF) said on Monday that Spain is meeting the terms of the banking bailout program, but more needs to be done as the country' s financial sector continues to face challenges. Spain's program implementation "remains on track, with action now taken on the vast majority of measures specified in the program's Memorandum of Understanding," said the IMF in its preliminary conclusions for the latest monitoring mission of the country's banking sector. Liquidity and solvency of Spain's financial system has been boosted by actions to recapitalize parts of the banking sector and financial market sentiment has continued to improve, the Washington-based global lender noted. However, it warned that "risks to the economy and hence to the financial sector remain elevated as Spain continues to undergo a difficult process of correcting large pre-crisis imbalances." "Further action at both the euro-wide and Spanish levels could help mitigate these risks and accelerate the return of economic growth," it said. The euro-wide actions include timely implementation of banking union and ensuring maintenance of a sufficiently accommodative monetary stance. At the Spanish level, priorities include continued pro-active monitoring of financial sector health accompanied by strong supervision. The IMF said that it welcomes the Bank of Spain's recent clarification of criteria for determining the classification of refinanced and restructured loans. "Rigorous application of these criteria should help ensure adequate provisioning for loan losses, " it added. An IMF staff steam visited Madrid from May 21 to 31 for the third monitoring mission of Spain's financial sector in the context of the European financial aid for the country's bank recapitalization. It was part of the technical assistance provided by IMF staff as agreed with the Spanish authorities and the European Commission (EC) in July 2012. A formal report will be presented to the Spanish authorities and the EC by early July. And another round of monitoring mission is expected to take place in September.