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« Supply-side constraints may hit BRICS: PM | Main | The [Recovery] Has No Clothes »
Thursday
Mar292012

Spain to slash spending as economy slumps back into recession

 

Spain’s fragile economy has fallen back into recession and the country faces a year of grinding economic decline as premier Mariano Rajoy slashes spending yet further to meet EU demands, according to The Telegraph.

The Bank of Spain said the “contractionary dynamic” in the economy continued into early 2012 for the second quarter in a row, with an “intensifying” pace of job losses. It expects GDP to fall by 1.5pc this year.

Mr Rajoy said at a meeting in Seoul that he would press ahead later this week with a “very austere budget”, ordering 15pc cuts in spending across the ministries.

The conservative leader promised a “fair and just” distribution of pain. Public sector salaries will be frozen rather than cut and there will be no rise in VAT.

It is unclear how he can slash the budget deficit from 8.5pc of GDP last year to 5.3pc to meet the compromise target agreed with Brussels after a bruising confrontation.

It is frankly impossible, given that it would aggravate the recession and this would crush state revenues,” said Jesús Fernández-Villaverde from the University of Pennsylvania.

Fresh data from Spain’s treasury showed the deficit for January and February was worse than for the same period last year, even stripping out “one-off” costs stemming from excesses by the regional juntas.

The lack of progress is grist to the mill of critics who argue that drastic “pro-cyclical” cuts can prove self-defeating, as Greece has discovered.

Spain’s unemployment rate is already 22.8pc, rising to more than 51pc for youths, the highest since records began.

While the Spanish have so far accepted austerity with stoicism, serious protest is emerging and the main trade unions have called a general strike for Thursday.

The strike takes us closer to Greece and farther from Germany,” said Miguel Martin, head of the Spanish banking federation (AEB), calling the move “absolutely pointless”. He added that Spain’s banks had lost a record €2bn (£1.67bn) in the final quarter of last year as the property bust deepened. “The banks are taking the full brunt of the crisis, and are not yet saved,” he said.

El Pais reported that the European Commission is prodding Spain to tap the EU’s bail-out fund to help restructure the banking system and head off a serious credit crunch.

EU officials said the Spanish government’s plan for €52bn in extra provisions from the banks will not be enough if the crisis continues. Madrid denied that there had been no “formal request” from Brussels.

Spanish lenders have increased their dependence on loans from the European Central Bank to a record €152bn, using the money to roll over debts or buy Spanish government bonds – concentrating risk further.

The Madrid bourse fell 1pc on Tuesday, the sixth day of declines, dropping to its lowest level this year.

Yields on 10-year Spanish bonds have crept back into the danger zone – decoupling from Italian yields – on fears that Spain’s crisis will prove intractable despite ECB largesse. They settled back slightly to 5.36pc on Tuesday.

Officials in Germany said Spain is reaping the bitter fruit of its own actions in unilaterally tearing up its original budget targets and picking a fight with the EU.

The yields are the proof. They are paying the price,” said a top member of the Bundestag’s finance committee.

Fitch Ratings said the upward revision in last year’s deficit from 6pc to 8.5pc of GDP had damaged Spain’s “fiscal credibility” but the agency did not blame the new government of Mr Rajoy for the failings.

Fitch said the 3pc deficit target for 2013 imposed by Brussels was “unrealistic”.


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Reader Comments (1)

More on how well the EU is taking care of their members Financial Problems...
Who believes that precious metals are passé?

March 30, 2012 | Unregistered CommenterDon

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