Europe

IMF 'shot in the arm' for Spain's austerity plan

Spain"s Prime Minister Jose Luis Rodriguez Zapatero
Image caption Mr Zapatero's measures have gained the support of other EU leaders

The visit to Madrid by the head of the IMF was overshadowed by a dark rumour: that Dominique Strauss-Kahn was coming to Spain to discuss a multi-billion euro bailout of its economy.

What emerged instead was a show of support for the Spanish government, and its recent attempts to rein in the budget deficit and pass long-delayed structural reforms.

The left-of-centre El Pais newspaper described comments by Dominique Strauss-Kahn that Spain's Socialist government is "moving in absolutely the right direction" as a "shot in the arm" for its recent - unpopular - reforms.

Spain's main trade unions called a general strike this week in response to a major overhaul of the labour market.

The government wants the measures to encourage firms to start hiring again, helping to reduce unemployment from 20%.

The unions fear the new regulations make jobs even less secure.

'Foundations'

But the IMF has long pushed for the reform, so following a meeting with Prime Minister Jose Luis Rodriguez Zapatero, the fund's director welcomed the news saying the government was laying the foundations for "two decades of economic growth".

Madrid's benchmark stock index rose by two points soon after the meeting.

The rumour that Spain's economy had reached crisis point and the government was about to request emergency funding originated in Germany.

It was furiously denied by all sides from the start, but Germany's Chancellor Angela Merkel then added fuel to the fire with a comment that EU funds are available to Spain, should it need them.

The news that the IMF's director was on his way then revived memories of the Greek bailout. That had been preceded by IMF visits to Athens.

Image caption Unions are threatening further strikes

"If Spain really did go the way of Greece, that would be very serious for the EU," one Madrid resident said, when asked if he believed rumours of an imminent bailout.

Spain's economy is five times the size of Greece's.

"I don't think anyone will let it get to that point. Not just for the good of Spain, but for everyone," he said.

'Full confidence'

Perhaps that is why Prime Minister Zapatero found such support at the European Council meeting on Thursday.

He arrived in Brussels armed with a labour reform, just approved by his cabinet, and a 15bn-euro package of austerity measures passed by parliament last month.

In response, EU leaders - including Angela Merkel - expressed their "full confidence in Spain".

"Merkel throws Zapatero a lifeline," was the response in the right-wing newspaper El Mundo.

"All the institutions and people usually frightened of the Spanish economy have proclaimed their absolute confidence in its strength," commented Publico newspaper.

"There's only one downside for Zapatero: none of them vote in the Spanish elections."

That line reflects the unpopularity of the government's reforms here at home.

Public sector workers have already staged a strike over a cut in their pay.

The unions have called a general strike for September and a recent poll showed the government's approval rating has plunged a full 10 points behind the opposition.

But as to rumours of impending meltdown, economists point out that Spain has a relatively low level of debt, compared to its GDP. They also highlight a successful bond sale on Thursday.

"The problem would be if no-one wanted to lend to Spain, but that's inconceivable right now," believes economist Diego Moreno, from Carlos III University in Madrid. "These rumours are pure alarmism."

Rumours

Demand for Spain's debt is still strong - the debt sale was oversubscribed - but the government is having to pay a considerably higher price to borrow, reflecting investors' perception there is a risk.

Image caption Mr Strauss-Kahn's visit comes amid rumours over the economy

Spain clearly has not convinced everyone it is a safe bet.

This week, a senior banker revealed that Spain's financial institutions are struggling to raise funds because of a persistent lack of confidence on the markets.

So Mr Zapatero is making a point of proving that Spain's banks remain strong.

His government plans to publish the results of "stress tests" on all financial institutions here, hoping that hard facts and transparency can dispel the rumours and fears.

"I think the IMF visit is enough to quash these rumours of default," believes Barcelona-based economist Robert Tornaell.

"But a rumour can grow very rapidly. The markets are very sensitive now."

Related Internet links

The BBC is not responsible for the content of external Internet sites