Spain is likely to remain in deep recession until the end of next year as "painfully high" unemployment and the need to shore up its banks weigh heavily on the economy, according to the Organisation for Economic Co-operation and Development (OECD).
The country was facing the prospect of becoming the next euro zone country to be bailed out by international creditors earlier this year. Market concerns have receded after the announcement of a new European Central Bank (ECB) bond-buying plan, and the Spanish government has been reluctant to ask for a bailout. Worries that Catalonia, Spain's richest states, might break away have also receded after elections earlier this week.
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"The prospect of an immediate recovery remains remote as deleveraging of the private sector still has a long way to go while the feedback loop between government finances and the banking sector remains strong, notwithstanding the loan of up to 100 billion euros from the euro area governments to recapitalize the banks," the OECD warned in its report.
"This feedback loop must be broken."
The OECD believes that recapitalizing the country's "viable" banks and shutting down its "non-viable" banks, which are struggling after a property bubble burst, should be the first priority for the Spanish government. It warned that the stabilization provided by the ECB would only be "temporary."
On Wednesday, the European Union gave the go-ahead for a major overhaul of four Spanish banks, including $48 billion in recapitalization funds and losses for bondholders.
The OECD also urged that tax rises on property and consumer goods, which are supposed to be temporary, should be kept around for longer and that other taxes should be raised.
Spaniards struggling under a 2013 austerity budget, which has already caused protests on the streets of its cities, will get cold comfort from the report.
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Analysts have expressed concern about Spain's ability to meet its deficit targets, mainly due to the underperformance of some of its regions.
"While we expect the central government to keep delivering on the front of fiscal consolidation, we remain of the view that it will be difficult for Spain to meet the overall general government budget deficit of 6.3 percent of GDP announced for this year as we think that the Regions will likely miss their target of 1.5 percent of GDP by at least 0.5 [percentage point]," Fabio Fois, European economist at Barclays, wrote in a research note.