‘Huge’ Spanish economic crisis spooks markets, hurts Italy

MADRID – Spain’s sickly economy faces a “crisis of huge proportions,” a minister said on Friday, as unemployment hit its highest level in almost two decades and Standard & Poor’s downgraded the government’s debt by two notches.

Unemployment shot up to 24 per cent in the first quarter, one of the worst jobless figures in the developed world. Retail sales slumped for the 21st consecutive month as a recession cut into consumer spending.

“The figures are terrible for everyone and terrible for the government ... Spain is in a crisis of huge proportions,” Foreign Minister Jose Manuel Garcia-margallo said in a radio interview.

Standard & Poor’s cited risks of an increase in bad loans at Spanish banks and called on Europe to take action to encourage growth.

The downgrade spooked financial markets, raising the interest rate fellow eurozone-struggler Italy was forced to pay to sell 10-year bonds at auction. The yield was its highest since January as investors worried about the economic outlook in the bloc’s indebted states.

Analysts said the 5.95-billion euro Italian auction went well under the circumstances, but Rabobank strategist Richard Mcguire said the 5.84 per cent 10-year yield “leaves a question mark over how long Italy will be able to finance itself at levels that can be deemed sustainable.”

Italy’s main banking association said the economy may contract by 1.4 per cent this year, more than the government’s 1.2 per cent forecast.

Spain’s country risk, as measured by the spread on yields between Spanish and German benchmark government bonds, spiked before levelling off to around 420 basis points.

Spain has slipped into its second recession in three years and fears that it cannot hit harsh deficit-cutting targets this year have put it back in the centre of the debt crisis storm, pushing up its borrowing costs.

Recovery and job creation are still two years off, Economy Minister Luis de Guindos said on Friday in a news conference where he forecast 0.2-per-cent growth in the gross domestic prod- uct next year and 1.4-per-cent growth in 2014.

De Guindos also said Spain would increase the valueadded tax and other indirect taxes next year, but would seek to reduce payroll taxes.

The government has already rescued a number of banks that were too exposed to a decade-long construction boom that crashed in 2008, and investors fear vulnerable lenders will be hit by another wave of loan defaults due to the slowing economy.