Spain 'probably in recession'

Mon, Apr 16, 2012, 01:00

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 today 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 30th. However, economy minister Luis de Guindos said gross domestic product was likely to have fallen a similar amount to the October-December period of 2011 when the economy shrank 0.3 per cent quarter-on-quarter.

Two successive quarters of falling GDP mark a recession, which has been widely expected in Spain, but Mr 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," Mr de Guindos said in an interview published in El Mundo newspaper.

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 per cent mark today for the first time since the beginning of December today. This raised worries that the government's borrowing costs could quickly reach unaffordable levels unless the European Central Bank resumed 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 Mr de Guindos.

The conservatives, which 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 euro zone's highest deficits.

Reuters