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Spain's PM Rajoy not to implement IMF suggestions to further cut public sector wages for now

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MADRID - Spain will not immediately implement the International Monetary Fund's latest recommendations, which include cutting government workers' wages further, because they are nonbinding advice, the prime minister said Saturday.

The IMF is one of three organizations Mariano Rajoy's government turned to for an assessment of the state of Spain's banking sector ahead of a €100 billion ($125 billion) bailout for failing lenders.

The latest IMF document, released Friday, was not part of a bank sector report, but one of regular economic analyses issued on the state of Spain's economy. It was critical of how Spain had missed its deficit reduction target in 2011 despite insisting "until almost the end of the year that the deficit was on track."

Spain's deficit for 2011 had to be revised upwards twice to finish at 8.9 per cent of economic output instead of the of 3 per cent maximum level set by the European Union.

Rajoy has set a goal of reducing the deficit to 5.3 per cent of gross domestic product, or GDP, in 2012. The IMF report called that goal "very ambitious" and said it would "likely be missed."

Rajoy said the IMF proposals, contained in the Friday report, were only suggestions and he would not implement them for now.

The IMF also suggested that Rajoy's government increase value-added tax, or VAT, a type of sales tax, and eliminates a recently re-introduced deduction on mortgage payments for first-time homebuyers. The previous Socialist government boosted VAT to 18 per cent and also reduced public sector pay by 5 per cent in 2010.

Rajoy has since frozen wages but resisted cutting them and hiking sales tax with the economy entering a double-dip recession.

Rajoy said that the most important item on Europe's political agenda was to reinforce the single currency's image.

"Europe has to transmit a message to the world making it clear that the euro is an irreversible project," Rajoy said.

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