Spain in recession as austerity bites deep

MADRID Mon Apr 30, 2012 3:22pm EDT

A trader gestures in front of his screens during a bond auction on a trading floor in Madrid, April 19, 2012. Spain entered its second recession since 2009 in the first quarter after more than four years of contraction or minimal growth in the aftermath of a collapse in its property market. REUTERS/Andrea Comas

A trader gestures in front of his screens during a bond auction on a trading floor in Madrid, April 19, 2012. Spain entered its second recession since 2009 in the first quarter after more than four years of contraction or minimal growth in the aftermath of a collapse in its property market.

Credit: Reuters/Andrea Comas

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MADRID (Reuters) - Spain sank into recession in the first quarter and economists said spending cuts aimed at meeting strict EU deficit limits, together with a reeling bank sector, would delay any return to growth until late this year or beyond.

It is the second recession in just over two years for the euro zone's fourth largest economy and comes as the government tries to convince investors it will not need outside aid to put its house in order.

The country is caught between pressure from its European peers to fix public finances and growing domestic resistance to austerity measures that have helped push unemployment to more than double the EU average.

Ratings agency Standard & Poor's added to the country's problems with a two-notch rating downgrade last week and on Monday it chopped the credit score of 11 banks.

While the 0.3 percent contraction from January to March from the previous quarter was slightly better than the forecast drop of 0.4 percent, it confirmed the economy is deteriorating.

"The wheels are very clearly coming off," Jefferies economist David Owen said. "It wouldn't surprise me to see a very significant decline in GDP both in the second and third quarters this year."

Spain was last in recession, defined by two consecutive quarters of contraction, at the end of 2009.

The government's latest economic plan, published on Friday before it was sent to the European Commission for approval, forecast a contraction of 1.7 percent in 2012 turning to meager 0.2 percent growth by next year.

Spain's demand for electricity, a good indicator of the strength of economic output, fell for the eighth month in a row in April, the national grid operator said.

Spanish bonds showed little reaction to the GDP report but yields have risen to around 6 percent in recent weeks. At around 7 percent, they are seen as financially unsustainable.

The IBEX share index finished April down 12.7 percent, its worst monthly showing in nearly 1-1/2 years..

BANKS IN FOCUS

The S&P downgrades of both Spain and its banks put the country's fragile financial sector back into the spotlight, while an unemployment rate nearing 25 percent 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 banks were damaged by a real estate collapse that began in 2008 and now bad loans in other sectors of the economy have risen sharply.

With virtually no access to wholesale funding markets, the banks have taken on a large amount of cheap European Central Bank money and bought domestic debt, helping the Treasury to fulfill half of its gross issuance already this year, an achievement that gives Madrid some room for maneuver.

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

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

The country's two largest banks Santander and BBVA have suggested they may not buy any more government bonds this year, adding to fears the Treasury may have to pay higher costs to place new debt.

Some investors have been betting the ECB will restart its program of buying bonds of troubled euro zone states but some of its policymakers are fiercely opposed to the idea.

Spain's regions, also in sharp focus after they were blamed for most of 2011's fiscal slippage, have been told to cut their own deficits or face central government intervention.

None of the 17 autonomous regions would require central government help to slash costs, a Finance Ministry source said. Regional authorities must pass their plans for reducing their deficits to Madrid by the end of Monday. The government will then have two weeks to approve the plan.

Economy Minister Luis de Guindos said on Monday Spain would announce plans to privatize parts of the public transport sector as part of its strategy to reduce the deficit.

PROTESTS

Alongside pressure from Europe for measures to stabilize the budget, there is resistance to the austerity measures needed to achieve this. Thousands of Spaniards took part in protests on Sunday.

There is growing opposition around Europe to the bitter medicine prescribed by policymakers from European institutions and from fiscally conservative countries such as Germany.

Economists, including some from the International Monetary Fund, have started to question whether it is right to push austerity at the expense of restarting growth.

"I assume we get some policy response out of the ECB and Spain is allowed to rein back on its fiscal austerity it is pushing through. There's certainly a lot of push back as people question the German-centric view of the world that everyone needs more austerity," said Owen.

Talk of growth stimulation in Europe does not exclude the need for austerity, German Finance Minister Wolfgang Schaeuble said on Monday during a conference in northern Spain.

"Not only do we need fiscal consolidation but we need it for something, to generate sustainable growth, which is the best way to generate employment," he said.

The Spanish government has announced savings of over 40 billion euros ($53.04 billion) this year from both central and regional government budgets, to try and cut the deficit to 5.3 percent of GDP from 8.5 percent of GDP in 2011.

Economy Minister de Guindos announced the transport privatization plan at the same conference as Schaeuble, but gave no details.

The conservative government, which took power from the Socialists in December, has told the banks to raise over 52 billion euros in capital this year.

However, with property prices expected by some to fall another 20-30 percent, many economists believe increased banking provisions against potential bad real estate loans will not be enough to stabilize the sector.

Some economists say the country will eventually need a financial bailout package like Greece and Ireland but the government has repeatedly said it will not seek outside help.

(Additional reporting by Martin Roberts, Nigel Davies and Manuel Ruiz, Editing by Anna Willard and Philippa Fletcher)

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Comments (8)
blitz2020 wrote:
Spain’s citizens finally being held accountable for the huge deficit spending of its elected socialist government?

The riots will be spectacular!

A lo hecho, pecho

Apr 30, 2012 10:43am EDT  --  Report as abuse
Seattle wrote:
And right wing Fascism (Austerity) marches on to doom because taxing the Rich where there is enormous revenue continues to be out of the question. There was never any socialist government in Spain and Franco never really left. ;-)

Apr 30, 2012 11:43am EDT  --  Report as abuse
flashrooster wrote:
Hmmm… immediately after the economic wave of instability swept over the world the US, thanks to Obama, turned to Keynesian-style stimulus spending and Europe has relied on austerity measures. The US’s economy has slowly been pulling out of the worst economic downturn since the Great Depression where as Europe continues to sink. Now the Republicans are arguing to follow Europe’s example, and if Romney wins the Presidency and the House remains firmly in the hands of the Republicans, not to mention the possibility of the Senate swinging to the right, we will change course and follow in the path of Europe, achieving the end to our recovery.

Then our economy will sink and Republicans will blame it on Obama’s policies despite those policies actually serving us well and the Republican policies clearly have not. However, the Republicans, if true to their word, will continue to cut taxes for the wealthy, continue to deregulate our industries, allowing the wealthy to cut corners, and will cut spending on programs what help average Americans and those in most need. So a small pocket of individuals will continue to grow wealthy and everyone else will suffer. It’s a recipe for disaster and the right is spending a lot of money to achieve this.

We’ve reached a point where Americans no longer have access to the truth, or if they do it’s so well hidden amongst the self-serving propaganda that no one knows what’s real anymore. Massive amounts of money are being spent to further the interests of a few and they control most of the sources from which we get our information. Look how much money broadcast companies make from our current election systems. These same broadcast companies are not going to go out of their way to report on how the money that’s making them rich has also corrupted our system and destroyed our ability to exercise free speech, speech our current Supreme Court equates with money. A democracy cannot succeed in such an environment as this. It’s impossible, and I challenge anyone to give me a viable explanation of how it can.

Apr 30, 2012 2:40pm EDT  --  Report as abuse
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