IMF: Spain's 'Hard Won' Solvency Needs Protection

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"Proactive vigilance" is needed to safeguard the "hard won" solvency of Spain's banking system, and Europe needs to do more to ease Spain's financial woes, the International Monetary Fund has warned.

In the fund's concluding statement from its most recent visit to Spain, the IMF said decisive action had been taken to clean up the country's banks, but it has so far not been enough to reverse the "financial fragmentation" the country is facing.

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The banking crisis in Spain has wiped out billions of euros of investors' money, with shares in nationalized lender Bankia tanking some 93 percent in the last year. The European Union (EU) approved 100 billion euros in aid for Spain's banking system earlier this month .

"Losses need to be promptly recognized and distressed assets sold to avoid tying up resources that could flow to more productive uses," the IMF said.

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The fund also urged euro-area authorities to do more to "ease Spain's adjustment" by pushing through rules on banking union and keeping monetary policy loose.

"Recent euro-area actions have reduced tail-risks and financial market stress. Nevertheless, these initiatives have not been sufficient to reverse financial fragmentation, fix the broken transmission mechanism, and deliver higher growth and employment, neither for the euro-area nor Spain," the IMF said.

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"Of particular importance to Spain would be moving faster to full banking union, which would help break the sovereign/bank loop by allowing Spanish firms to compete for funds on their own merits rather than on their country of residence," the fund added.

Further ECB measures are also needed to reduce the very high borrowing costs that Spain's private sector faces, the IMF said.

By CNBC's Jenny Cosgrave: Follow her on Twitter @jenny_cosgrave