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Spain in recession as austerity bites

Madrid - Spain has back tipped into recession, an official estimate confirmed on Monday, even as the government pressed ahead with unpopular spending cuts to rein in burgeoning debt.

Spain's economy shrank by 0.3% for the second straight quarter in the the first three months of 2012, according to preliminary data by the National Statistics Institute.

The return to recession, blamed on weak domestic demand only partially compensated by exports, comes barely two years after Spain emerged from the last downturn at the start of 2010.

It was no surprise coming days after an even more pessimistic diagnosis by the Bank of Spain, which predicted the economy would shrink by 0.4% in the first quarter.

But it was the first official estimate to confirm a recession - two quarters of shrinking economic output.

Despite the recession and a towering unemployment rate, which hit 24.4% in the first quarter, the government has vowed to meet its ambitious deficit-cutting targets so as to regain market confidence.

Tens of thousands of people took the streets on Sunday to protest against the conservative Popular Party's spending cuts, however, especially in health care and education.

Across the eurozone, meanwhile, the emphasis on austerity remedies during a recession is increasingly come under question.

Investors' doubts about Spain's ability to meet its deficit goals are amplified by the plight of Spain's banks, many bogged down in bad loans extended during the property boom.

Markets fear the state may have to step in to help some banks' fragile balance sheets, placing its own deficit under further stress.

Standard & Poor's on Monday downgraded the ratings of the top Spanish banks, including Santander and BBVA, after slashing the country's credit standing because of the deficit and the recession.

The banks affected include Santander and its subsidiary Banesto, BBVA, Banco Sabadell, Ibercaja, Kutxabank, Banca Civica, Bankinter and the local unit of Barclays.

S&P on Friday slashed Spain's sovereign rating by two notches to 'BBB+' and said Monday the same considerations "could have potentially negative implications for our view of the economic risk and industry risk affecting the Spanish banking industry."

“Spain’s still very much recession and we think that this isn’t going to improve soon. It’s likely they’ll have to create more fiscal tightening in order to catch up if they wish to avoid going in to plan, and that’s going to be counterproductive,” economist at Citi Guillaume Menuet said.

The Spanish government’s updated economic stability plan, published on Friday before sending it to the European Commission, saw an estimated contraction of 1.7% in 2012 turning to 0.2% growth by next year.

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