IMF Sees Spain Progress, Wants Failed Lenders Wound Down

“The main finding of the preliminary report mission is that important progress has been made in reforming the financial sector,” the IMF said in a statement today during the first visit this month by a team of its officials to monitor Spain’s bank rescue. “It will be important to maintain the momentum as important challenges lie ahead.”

Concerns about the impact on government finances from the costs of propping up failing lenders such as the Bankia group helped push Spain to seek a bailout of as much as 100 billion euros ($129 billion) for its banking system in June. While financial conditions have improved since the European Central Bank made its pledge in September to buy Spanish bonds, the economy and lenders still “face headwinds,” the IMF said.

Spain’s stress tests that were a condition of the bailout were a sound guide for identifying banks that need capital, the IMF said. Capital shortfalls must be made up quickly and “non- viable banks promptly wound down,” the IMF said.

Spain will need to make “strong efforts” to have its so- called bad bank, or vehicle to house the soured real estate of banks that take state aid, fully up and running by a deadline at the end of November, the IMF said. Mergers of banks that don’t clearly generate value and undue constraints on credit supply should be avoided, it said.

The IMF said it will pass a final report on the Spain visit to the government and the European Commission in November.

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