IMF raises fresh concerns about the Spanish economy

The International Monetary Fund (IMF) has raised fresh concerns about Spain's economy, saying "far-reaching" reforms are needed to ensure its recovery.

It said the country faced "severe" challenges, including the need to urgently reform a "dysfunctional" labour market, and its banking sector.

The IMF's comments came after Spanish authorities had to rescue regional lender Cajasur at the weekend.

Last week, Spain's government passed austerity measures to cut its deficit.

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It is not the first time that the IMF has said Spain needs economic reform, but the language has a much greater sense of urgency

Andrew Walker BBC economics correspondent

This deficit - the money the administration has to borrow to pay for public services due to insufficient tax returns and other revenues - currently equates to 11% of Spain's economic output.

This is substantially higher than the eurozone ceiling of 3% and another concern that the IMF has highlighted.

It also pointed to Spain's property market slump, heavy indebtedness in the private sector, and weak productivity and competitiveness.

'Bluntly'

"It is not the first time that the IMF has said Spain needs economic reform, but the language has a much greater sense of urgency," said BBC economics correspondent Andrew Walker.

"The IMF says bluntly, the Spanish labour market is not working and needs reform of pay bargaining and lower payments for fired workers."

Last week, the Spanish government approved a 15bn euro austerity plan, including a 5% cut to public sector salaries, as it aims to reduce its deficit.

Spain is also having to cope with unemployment of more than 20%.

Concerns about the Spanish economy have to be seen in the light of the recent financial crisis in Greece, which has a deficit amounting to 13.6% of GDP.

Amid fears that Greece could default on its debt payments and that the crisis could spread to Spain, the 27 member states of the European Union and the IMF joined together to agree an emergency package worth 750bn euros ($975bn; £650bn).

This includes access to 440bn euros of loan guarantees for struggling nations, and 60bn euros of emergency European Commission funding.

The remaining 250bn euros comes from the IMF.