The International Monetary Fund urged Spanish officials to be ready to force banks to restrict bonuses and cash dividends in case such measures are needed to boost the strength of the financial system.
The Bank of Spain should also consider forcing banks to sell stock if potential losses are detected, the Washington-based lender said today in a quarterly assessment of the Spanish bank bailout. The program is on track, it said.
“To safeguard the program’s gains, it will be important to continue closely monitoring the health of the financial system and refine the financial sector reform strategy if needed,” the IMF said. Risks “should be addressed at the earliest possible stage through strong supervisory action.”
Spain has ordered banks to recognize 84 billion euros ($109 billion) of losses on real estate to clean up their balance sheets. While the government avoided a full bailout, it is recapitalizing lenders with about 40 billion euros of European funds, and the IMF said losses at banks could increase.
“Downside risks dominate, including the risk that the rise in unemployment -- which is already around the rates assumed in the adverse case -- will continue to outpace expectations,” the report said.
The European Union said today that the government of Prime Minister Mariano Rajoy is dragging its feet on economic reforms, increasing risks to the banking system. EU officials, who visited Madrid in January to monitor the bailout, said Rajoy needs to do more to fix the labor market, boost confidence in its budget controls, increase competition, and control losses in the pension system and the power system.
IMF officials also counseled Spain to change its bankruptcy regime. Spanish law, which gives mortgage lenders a claim on all assets and income of defaulting borrowers, reduces the incentive for insolvent people to work and pushes them into the black economy according to the report.
People with “no reasonable hope of repaying their debts have little incentive to produce income in the formal sector,” the IMF said. “An insolvency regime that is overly lenient toward debtors could also create adverse incentives, including disincentives for loan payment, which in turn could adversely affect financial stability and credit availability.”