As with the patrons of any prostitute, sovereigns desirous of those unnatural caresses ministered by the International Monetary Authority must, in exchange, subject themselves to a number of indignities prior to any sort of carnal gratification, much less la petite mort (of their credit rating). And so it came to pass that Spain condescended to submit its fiscal vessel to violation by an IMF mission.
After one of the shorter encounters yet witnessed between consenting adults, yesterday the IMF issued its "Concluding Statement of the Mission," a sort of "John review," except that instead of going in a little black book to be published in a tell-all in the event of legal trouble or financial difficulty, it's posted right on the IMF's webpage. The abstract reads thusly:
Spain’s economy needs far-reaching and comprehensive reforms. The challenges are severe: a dysfunctional labor market, the deflating property bubble, a large fiscal deficit, heavy private sector and external indebtedness, anemic productivity growth, weak competitiveness, and a banking sector with pockets of weakness. Ambitious fiscal consolidation is underway, recently reinforced and front-loaded. This needs to be complemented with growth-enhancing structural reforms, building on the progress made on product markets and the housing sector, especially overhauling the labor market. A bold pension reform, along the lines proposed by the government, should be quickly adopted. Consolidation and reform of the banking system needs to be accelerated. Such a comprehensive strategy would be helped by broad political and social support, and time is of the essence.
For a little perspective, let us compare this assessment with the IMF Mission Concluding Statement for Moldova, which has only been free of the Soviet Union since 1991 (and will only remain so until 2014): (GDP per capita: $1514 to Spain's $31,946):
Over 2006-08, Moldova saw strong growth accompanied by rising macroeconomic vulnerabilities, and hesitant progress in its transition to a market economy. Buoyant domestic demand, financed by booming remittances, credit, and FDI, resulted in an average growth of over 5 percent but also widened the current account deficit and generated inflation pressures. The real effective exchange rate (REER) appreciated substantially and, together with exogenous shocks, dampened export growth. Despite some progress in structural reforms, the economy remained overregulated and hampered by relative price distortions. High barriers to entry and low competition in telecommunications, trade, and food processing kept domestic prices significantly above international prices of many consumer products. In contrast, utility tariffs generally remained well below cost-recovery levels, leading to substantial arrears and underinvestment.
As with most financial disclosures by agencies or quasi-government entities, the age of Farcism requires a bit of reading between the lines to tease out the truth. It never pays, of course, to wound the pride of a prostrate sovereign pleading desperately for cash infusions to avoid a decades-long spending-spree induced collapse. Our translation services might help clear things up for those not fluent in la lingua bullshit. Consider:
Slowing population growth, high unemployment, and weak investment all weigh on potential growth, underlining the importance of growth-enhancing structural reforms.
Read: Spain better tax the stuffing out of the young now, or the entire Paella is going to end up on the dusty tile floor. Also, let's find the genius who passed all those laws making it almost impossible to fire new employees, and tie his genius arms behind his genius back and put him in a bullfight or two. Your unemployment rate for the 16-24 bracket is the highest on the continent at 43%. Sure, some of that is because your youth wishes to be kept in the style to which it has become accustomed. But a larger part of it is because once hired, its impossible to fire the little brats. Look, buster, if you want to tax them to death you are going to have to hire them, no matter how loud the unions complain. That means dumping lifetime job security.
The wage bargaining system, which hamstrings wage and firms’ flexibility, is ill-suited to membership of a currency union. The government has provided some broad guidelines for reforming the labor market to be negotiated by the social partners. An agreement is expected by the end of May.
Read: Speaking of unions.... Oh, and we meant the end of May of 2013. If you want it any sooner you are going to have to send a few union leaders out for the dirt nap.
A radical overhaul of the labor market is urgent. The reform will need to be ambitious and comprehensive if it is to significantly change labor market dynamics and to avoid missing an historic opportunity.
Read: Your labor market rules make Detroit look like Milton Friedman's wet dream. You are going to have to fire about half the government workers, including yourself.
Ideally the social partners will quickly deliver such an overhaul, but if not, the government will need to follow through on its commitment to take action itself, including on collective bargaining.
Read: Of course, by "social partners" we mean "parasitic unions." Oh, and when we say "follow through on its commitment to take action itself" we mean retaining the Pinkertons and cracking some heads. No, we don't think fascism has a bad name in Spain, actually.
Risks to achieving the targets come from both the implementation of the measures and the underlying projections of a fairly rapid recovery.
Read: If Spanish reforms are implemented by the Spanish, Spain is fucked.
Read^2: Unless the RFP is published exclusively in German, Spain is fucked.
Spain faces strong spending pressures over the longer term due to aging and slower population growth. The government has outlined possible reforms, including raising the retirement age to 67. These measures, together with others (in particular, an automatic link to life expectancy) would strengthen the sustainability of the system and bring Spain closer in line with European peers that have already reformed their pension systems. As such reforms would boost fiscal sustainability without undermining growth, they should be quickly adopted.
Read: Cutting subsidized health care for the elderly (i.e. over 35) and increasing mortality rates in this bracket (see e.g., Britain) is a critical step.
Further strains may arise from the unwinding of the exceptional liquidity measures by the ECB, the ending of the funding guarantee scheme, and from the intense competition for deposits.
Read: Once the ECB returns collateral requirements to levels above the Zimbabwe threshold, your banks are screwed. Plan accordingly.
To this end and to enhance investor confidence, a comprehensive and transparent bank-by-bank “diagnostic” based on conservative assumptions on asset valuation and prospects could usefully be carried out.
Read: Bullshit stress tests seem to buck up the men.
Under the current framework, cross-region mergers still need to be approved by regional governments, the sector remains closed to external investors, and savings banks’ capacity to raise external capital remains limited, putting public funds are [sic] at risk. The legislative and policy priority should be to: (1) reduce political influence in savings banks; (2) enhance their ability to raise external capital, and (3) offer an opportunity to transform into stock-holding companies, and, indeed, requiring this for systemically important savings banks. This reform should be implemented promptly so savings banks can have the full range of options to raise capital as soon as possible.
Read: You suck at running banks. Stop it. Seriously. We're worried about you. Plus, we hate vacationing in France. It's filled with the French. (See French "Hot or Not" entry).