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Market relief no cure for Spain’s economy

Government dismissed warnings that Spain might need an international bailout

A Bankia-Bancaja branch that has been closed in Ronda, near the southern Spanish city of Malaga
Image Credit: Reuters
A Bankia-Bancaja branch that has been closed in Ronda, near the southern Spanish city of Malaga. The IMF has forecast Spain’srecession will be worse than predicted, as growth figures are due to be released today.
Gulf News

Madrid: Vows of support for the Eurozone calmed financial worries about Spain this week but could not polish its economy, whose recession is set to deepen as unemployment nears 25 per cent.

European Central Bank chief Mario Draghi delighted investors Thursday when he vowed “to do whatever it takes to preserve the euro”, which implied the bank may ease credit conditions by buying bonds or making cheap loans.

“We hope Draghi’s words will last and will serve as an oxygen tank for the financial markets in the coming weeks,” said analysts at brokerage Link Securities in a report.

But they added: “This does not mean the problems of the economies of southern Europe are over.”

After Draghi’s comments, Spain’s sovereign interest rates eased back from danger levels and Madrid’s stock market shot up on Thursday and Friday, recovering some of the huge falls of previous days.

The government Friday dismissed warnings that Spain might need a full international bailout as economists have warned.

But Spain’s economic and financial problems run deep, the legacy of a decade-long real estate boom that went bust in 2008 with the debt crisis.

The International Monetary Fund (IMF) warned Friday that the Spanish recession would be worse than previously thought, forecasting a contraction of 1.7 per cent this year and of 1.2 per cent in 2013.

Spain’s economic growth figures for the second quarter were due to be released on Monday by the national statistics office.

The Bank of Spain last week estimated the contraction in growth has accelerated in the second quarter to 0.4 per cent, after falls of 0.3 per cent in each of the previous two quarters.

Under pressure from European authorities who have agreed to bail out Spanish banks, Spain’s conservative government has approved tens of billions of euros’ worth of spending cuts, tax hikes and other measures to cut the deficit and restructure the economy.

Critics say that the poor will suffer unfairly from moves such as a public sector bonus cut and a rise in sales tax that together will hit consumption.

“All the spending cut policies they are taking are restrictive and run counter to growth,” said Alberto Roldan, an analyst at Spanish brokerage Inverseguros.

“Raising the fiscal pressure in a country with 25 per cent unemployment is absolutely regressive.”

Hundreds of thousands of Spaniards have marched noisily in the street over recent weeks in protest at the measures. Labour unions have threatened a general strike and have called for fresh demonstrations on September 15.

Figures from the national statistics office Friday showed Spain’s jobless rate rose in the second quarter to 24.63 per cent and a huge 53 per cent among the under-25s, despite the tourist season which usually boosts jobs.

The job losses “are further blows for households already struggling to cope with poor real income developments and the prospect of a sharp VAT hike”, wrote Raj Badiani of analysis group IHS Global Insight.

“Very low consumer confidence will weigh down heavily on spending in late 2012 and 2013, adding further tensions to a faltering economy,” he added.

The Spanish government’s latest unemployment forecast is for a rate of 24.6 per cent at the end of 2012, easing to 24.3 per cent in 2013 and 23.3 per cent in 2014, but some economists made darker forecasts.

Analysts at financial group Citi forecast unemployment would average 24.7 per cent in 2012 and climb to 26.1 per cent next year. Badiani forecast the rate would top 25 per cent in late 2012 and early 2013.

Economists were waiting for the European Central Bank’s next policy meeting on August 2 to see if it announces concrete measures.

“The crisis in the Eurozone is as much about growth as it is about debt,” wrote John Higgins of consultancy Capital Economics.

“Buying sovereign bonds does nothing to address the fundamental problem of a lack of competitiveness that plagues troubled Eurozone countries.”