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Spain 'makes progress but huge reform needed'

Source: AFP - Mon 20th Dec 2010

Spain has good prospects of beating its recession crisis and overcoming deep market distrust of its debt burden, but faces a huge task in reforming outdated structures, the OECD said on Monday.

Spain, in the eye of financial markets which are shunning its debt bonds, has done much right, is fighting the crisis well, but must reform its labour legislation and employment practices, the Organisation for Economic Cooperation and Development said.

The economy, which stalled in the third quarter after edging out of deep recession, is now set for "subdued" growth but the blows of the last two years will leave "lasting" scars and the unemployment rate, now about 20 percent, will remain among the highest in the European Union, the OECD estimated.

This regular country assessment is likely to be read in particular detail on financial markets which see Portugal and Spain as being at high risk of eventually needing a debt rescue, as has already been the case for Greece and Ireland.

The sovereign debt crisis in the eurozone took a new turn at the end of the last week when European Union leaders agreed to adjust a basic treaty to create a permanent rescue fund, marking a small but important step towards new EU-eurozone architecture.

But several analysts said the leaders had again spoken too much in general terms, and not provided enough specific detail to reduce uncertainty for investors.

It was in this context that the OECD report on Spain referred to a problem of a lack of confidence undermining policies by the Spanish government to correct public finances.

While giving good marks to the Spanish government's management, it warned that the crisis laid bare fundamental economic problems, estimating that more than half of the deterioration of public finances was structural and could be tackled only by reforms.

"The economy is slowly emerging from a deep recession, which will have a lasting effect," the OECD said.

"While fiscal and financial policies had been relatively prudent before the crisis, investor confidence declined during the crisis and this may weigh on the recovery as sovereign spreads remain high," it added.

This was a reference to the risk premium which Spain must pay to borrow, even though the European Central Bank has bought Spanish debt heavily to hold down the interest rates.

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