Spain slips into recession

Spain's economy slipped into recession in the first quarter as domestic demand shrank, data showed today, with deep government spending cuts in an uphill battle to trim the public deficit likely to delay any return to growth.

Gross domestic product shrank 0.3 per cent in January-March from the previous quarter according to preliminary National Statistics Institute data, unchanged from October-December and compared to a Reuters poll expecting a 0.4 per cent contraction.

Madrid is under intense pressure from its European peers to streamline the euro zone's fourth largest economy, reduce a massive public deficit and fix a banking system battered by a four-year economic slump and a burst property bubble.

On an annual basis the economy contracted by 0.4 per cent compared with growth of 0.3 per cent in the previous quarter, the data showed. Economists polled by Reuters, as well as the Bank of Spain, had forecast a slippage of 0.5 per cent.

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 per cent in 2012 turning to 0.2 per cent growth by next year.

Ratings agency Standard & Poor's added to the country's problems with a two-notch rating downgrade last week and today it chopped the credit score of eleven banks.

The downgrades put the country's fragile banking system back into the spotlight, while massive unemployment will remain a drag on already tight public accounts.

"Did you need any more reasons to short Spanish debt?" the 4Cast consultancy said in a research note on Monday."(The downgrade) is a slap in the face of the government's austerity drive, especially as it is partly based on the expectation of fiscal slippage in 2012-2015 and partly on 'the increasing likelihood that the government will need to provide further fiscal support to the banking sector'"

The banks were damaged by the real estate collapse that began in 2008 and now bad loans in other sectors of the economy have risen sharply.

They have virtually no access to the wholesale debt markets and have taken on a large amount of cheap European Central Bank debt and have bought domestic debt, helping the Treasury to fulfil half of its gross issuance already this year.

ECB data today showed that Spanish and Italian banks filled their coffers with government bonds last month, confirming that they had helped keep a lid on yields.

But non-residents, which before December held an average of around 50 per cent of Spain's debt, held just 37.5 per cent in March, the Treasury said.

Reuters