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Madrid - Spain’s economy minister admitted that the country has probably tipped into its second recession since 2009, as government debt yields climbed back towards danger levels on Monday on concerns that Madrid will miss its strict budget deficit targets.
Official data on total economic output in the first three months of this year is not due until April 30.
However, Economy Minister Luis de Guindos said gross domestic product (GDP) was likely to have fallen a similar amount to the October-December period of 2011, when the economy shrank 0.3% quarter-on-quarter.
Two successive quarters of falling GDP mark a recession, which has been widely expected in Spain, but de Guindos said the downturn may not be as bad as first thought.
“At the moment I see a first quarter with a similar pattern to the last quarter of last year,” de Guindos said in an interview published in El Mundo newspaper on Monday.
However, he added: “If you had asked me two months ago, I would have expected the first quarter of 2012 to be much worse than the last quarter of last year. But that’s not going to be the case.”
The conservative government says it is committed to making major budget cuts.
But concern is growing on financial markets that the recession will make it impossible to meet the deficit targets and that Spain will have to seek some kind of an international bailout like Greece, Ireland and Portugal.
Spanish 10-year government bond yields broke through the 6% mark on Monday for the first time since the beginning of December on Monday.
This raised worries that the government’s borrowing costs could quickly reach unaffordable levels unless the European Central Bank (ECB) resumes buying government bonds in a programme which has helped to keep yields down in recent months.
“We’re back in full crisis mode,” said Rabobank rate strategist Lyn Graham-Taylor.
“It is looking more and more likely that Spain is going to have some form of a bailout. Assuming there is not an (ECB) intervention you would not see a cap on Spanish yields, they would just keep increasing.”
Spain’s economy has been in shrinking or stagnating since a property bubble burst in 2008. With house prices still sliding, the survival of some banks and the ability of the new government to control its finances are in doubt.
Lower Euribor interest rates, used to set most Spanish mortgages, had given some relief to cash-strapped consumers in a country plagued by massive unemployment, said de Guindos.
The conservatives, who won elections last November on dissatisfaction with the previous Socialist government’s handling of the economic crisis, have passed a number of measures to reduce one of the eurozone’s highest deficits.
However, faith in Prime Minister Mariano Rajoy’s ability to work within eurozone budget limits has been tested since he unilaterally eased the 2012 deficit target at the beginning of March, prompting debt risk premiums to rise sharply.
Waning support
Public support for Rajoy tumbled in April due to the austerity plan which slashed ministry budgets, raised taxes and aims to reform the treasured health and education sectors, an opinion poll showed on Sunday.
The government is facing increased social pressure after violent protests broke out in parts of Spain for the first time since the crisis began, during a general strike on March 29.
International investors are also increasingly disillusioned by Rajoy’s efforts after only just over 100 days at the helm.
“Questions surrounding Spain’s commitment to fiscal consolidation, together with a weak economy and banking sector, increases the chances of an EU/IMF bailout,” Capital Economics wrote in an investors’ note on Monday.
The Treasury will test the markets this week with two bond issues, including the benchmark 10-year which is one of the longest-dated bonds to be put to a primary auction this year. Investors expect to see some support from domestic banks.
Non-resident support for Spanish debt has plummeted this year as Spain’s banks, engorged with cheap three-year ECB loans and unable to access wholesale markets, bought into sovereign debt.
At the end of December, non-residents held over 50% of Spanish debt, though this had shrunk to just 42% at the end of February, Treasury figures showed.
Banks’ financing problems have fed through to businesses across Spain with private credit falling by about 4%, de Guindos said.
The government would help solvent small and medium-sized businesses struggling to get credit from banks with measures to be announced in the next few weeks, he added.
Official data on total economic output in the first three months of this year is not due until April 30.
However, Economy Minister Luis de Guindos said gross domestic product (GDP) was likely to have fallen a similar amount to the October-December period of 2011, when the economy shrank 0.3% quarter-on-quarter.
Two successive quarters of falling GDP mark a recession, which has been widely expected in Spain, but de Guindos said the downturn may not be as bad as first thought.
“At the moment I see a first quarter with a similar pattern to the last quarter of last year,” de Guindos said in an interview published in El Mundo newspaper on Monday.
However, he added: “If you had asked me two months ago, I would have expected the first quarter of 2012 to be much worse than the last quarter of last year. But that’s not going to be the case.”
The conservative government says it is committed to making major budget cuts.
But concern is growing on financial markets that the recession will make it impossible to meet the deficit targets and that Spain will have to seek some kind of an international bailout like Greece, Ireland and Portugal.
Spanish 10-year government bond yields broke through the 6% mark on Monday for the first time since the beginning of December on Monday.
This raised worries that the government’s borrowing costs could quickly reach unaffordable levels unless the European Central Bank (ECB) resumes buying government bonds in a programme which has helped to keep yields down in recent months.
“We’re back in full crisis mode,” said Rabobank rate strategist Lyn Graham-Taylor.
“It is looking more and more likely that Spain is going to have some form of a bailout. Assuming there is not an (ECB) intervention you would not see a cap on Spanish yields, they would just keep increasing.”
Spain’s economy has been in shrinking or stagnating since a property bubble burst in 2008. With house prices still sliding, the survival of some banks and the ability of the new government to control its finances are in doubt.
Lower Euribor interest rates, used to set most Spanish mortgages, had given some relief to cash-strapped consumers in a country plagued by massive unemployment, said de Guindos.
The conservatives, who won elections last November on dissatisfaction with the previous Socialist government’s handling of the economic crisis, have passed a number of measures to reduce one of the eurozone’s highest deficits.
However, faith in Prime Minister Mariano Rajoy’s ability to work within eurozone budget limits has been tested since he unilaterally eased the 2012 deficit target at the beginning of March, prompting debt risk premiums to rise sharply.
Waning support
Public support for Rajoy tumbled in April due to the austerity plan which slashed ministry budgets, raised taxes and aims to reform the treasured health and education sectors, an opinion poll showed on Sunday.
The government is facing increased social pressure after violent protests broke out in parts of Spain for the first time since the crisis began, during a general strike on March 29.
International investors are also increasingly disillusioned by Rajoy’s efforts after only just over 100 days at the helm.
“Questions surrounding Spain’s commitment to fiscal consolidation, together with a weak economy and banking sector, increases the chances of an EU/IMF bailout,” Capital Economics wrote in an investors’ note on Monday.
The Treasury will test the markets this week with two bond issues, including the benchmark 10-year which is one of the longest-dated bonds to be put to a primary auction this year. Investors expect to see some support from domestic banks.
Non-resident support for Spanish debt has plummeted this year as Spain’s banks, engorged with cheap three-year ECB loans and unable to access wholesale markets, bought into sovereign debt.
At the end of December, non-residents held over 50% of Spanish debt, though this had shrunk to just 42% at the end of February, Treasury figures showed.
Banks’ financing problems have fed through to businesses across Spain with private credit falling by about 4%, de Guindos said.
The government would help solvent small and medium-sized businesses struggling to get credit from banks with measures to be announced in the next few weeks, he added.
