Spain sinks deeper into mire

Source:AFP Published: 2012-7-23 23:25:08

Spain denied Monday that it needed a full international bailout as the economy shrank even faster and its long-term borrowing costs jumped to dangerous highs.

The Bank of Spain said the economy contracted 0.4 percent in the second quarter, worse than the 0.3 percent of the first, citing the impact of the debt crisis on consumer spending and confidence.

On Friday, the government said the recession would continue next year, instead of end with modest growth as it had previously forecast.

The bad data compounded Madrid's pressing problems, chief among them how to cut an unprecedented unemployment rate of more than 24 percent while at the same time stabilizing a stricken banking system and the public finances.

Financial markets have turned increasingly against Madrid in recent weeks after an initial positive reaction to a massive 65 billion euros austerity package turned sour, with each new initiative failing to hold the line.

In early afternoon trade, the yield - the rate of return investors earn - on the benchmark Spanish 10-year government bond jumped to 7.487 percent from 7.225 percent on Friday, well above the 7 percent danger level for long-term funding.

"There are fears that Spain is edging closer to being forced to seek a full scale bailout," said Joshua Raymond, chief market strategist at City Index traders.

Borrowing costs for other struggling eurozone states were also under pressure as the debt crisis returned with a vengeance despite an EU bank rescue deal worth up to 100 billion euros ($122 billion) for Spain which was finalized Friday.

The Italian 10-year bond yield jumped to 6.357 percent from 6.149 percent.

Any yield over 6.0 percent is widely seen as unsustainable for long-term funds, with 7.0 percent the level at which Greece, Ireland and Portugal had to ask for outside help from the EU and International Monetary Fund.

Spanish Economy Minister Luis de Guindos insisted Monday that the country did not need a full bailout but noted that the crisis appeared more than any one state could cope with.

"Spain is a solvent country and this solvability will allow us to get through the difficulties we are facing right now," the minister said.

De Guindos will hold talks with his German counterpart on Tuesday, a German government spokeswoman said, adding that Berlin had "no information" that Spain was poised to make an application for a full-blown state bailout.

AFP

 



Posted in: Economy

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