Spain Economy Still 'Very Challenging' Despite Progress

Spain Economy
Eduardo Dieguez | AFP | Getty Images

Risks to Spain's economy and financial sector remain elevated as the country undergoes a difficult process of fiscal and external adjustment, the International Monetary Fund reported Monday.

The IMF's statement came after the fund's second quarterly visit between Jan. 25 and Feb. 1 to review the country's financial sector.

Despite its concerns, the IMF praised Spain's progress in bank recapitalization.

"This clean-up is a major achievement that should strengthen confidence in the system and improve its ability to support the real economy," the IMF said.

"Remaining elements of the recapitalization and burden sharing exercise should be completed in a timely manner and in ways that minimize taxpayer costs."

The IMF was also complimentary about Spain's success in establishing a "bad bank" called SAREB.

"Important progress has been made. Key achievements include the establishment of the company, the receipt of real estate-related assets from the weakest banks, and the adoption of strong servicing agreements, with participating banks to manage the transferred assets."

Olli Rehn, vice president of the European Commission, said the review proved that reform of Spain's banking sector is on track.

"Bank recapitalization and restructuring is under way, and the asset management company SAREB is up and running.

"In parallel, important decisions have been taken to reinforce the supervision and regulation of the sector," Rehn said. "This process must be completed on schedule and implemented rigorously."

In a joint statement, the EC and the European Central Bank said: "Although prospects have recently improved, the economic situation remains very challenging, with very high and rising unemployment, gross domestic product contraction, and a need to reduce large stocks of internal and external debt."

It added: "Notwithstanding the significant policy progress already made, further advances remain necessary in the consolidation of public finances -- including reinforcing the institutional framework -- and in the swift completion and implementation of the structural reform agenda, along the lines specified in last year's country-specific recommendations."

Spain's next review is scheduled for May, the statement said.

- By CNBC's Katy Barnato