ECB chief calls for new reforms in Spain

MADRID: European Central Bank chief Jean-Claude Trichet pressed Spain to enact new, deep-rooted reforms to accelerate the economy, in an interview published on Tuesday.

Trichet urged firm action to calm debt markets, which have sent Spain and Italy's borrowing costs spiralling and prompted the ECB to intervene with massive buying of government debt.

"Spain must carry on paying special attention to resolutely applying new structural reforms so as obtain the maximum possible potential growth, improve productivity and thus regain investor confidence," Trichet told the business daily Expansion.

The central bank chief spoke shortly before Standard & Poor's cut Italy's debt rating, sending financial markets sliding.

The Spanish economy plunged into recession in late 2008 as the global financial meltdown compounded a property bubble collapse.

The economy steadied in 2010 and grew just 0.2 percent in the second quarter of 2011, not enough to make a dent in a towering unemployment rate of 20.89 percent.

Under pressure from the markets, Spain has rammed through a battery of reforms to repair state balance sheets, free up the job market, cut pension costs and to strengthen banks.

The government has forced the banking sector to restructure, imposing mergers on savings banks and requiring them to boost liquidity to offset a mountain of loans exposed to the stricken property sector.

"The situation has improved considerably but we have to remain on permanent alert," Trichet warned.

"Every month the ECB's governing council calls on European banks to strengthen their balance sheets, to use criteria of prudence and moderation with regards to salaries and to turn to the public authorities for support when necessary," he said.

Trichet did not specify which reforms Spain should pursue.

In a report in July, the International Monetary Fund called on Spain to take extra steps to consolidate public finances and urged bold reforms of the job market.

Spain's government announced last week it will re-introduce a wealth tax abandoned just three years earlier.

This month, the government also passed a constitutional reform to limit future budget deficits, trying to prove its determination never to slide deep into the red again.

It is now scrambling to raise extra money in 2011 to meet a deficit-cutting target: telling firms to pay tax instalments early, lowering state spending on medicines and stimulating new home purchases with a tax cut.

Spain has promised to reduce its annual public deficit from the equivalent of 9.2 percent of gross domestic product last year to 6.0 percent of GDP this year, 4.0 percent in 2012 and 3.0 percent in 2013.

Last year, the government raised sales taxes, froze old age pensions, cut public workers' wages by five percent, forced banks to strengthen balance sheets, raised the retirement age and made it easier for firms to hire and fire.

Copyright AFP (Agence France-Presse), 2011