News Column

Spain, EU Dismiss Bailout While Borrowing Costs Soar

July 23, 2012
Euro

The Spanish economy needs no bailout from the European Union and the International Monetary Fund, Spanish government and European Commission representatives said Monday, while borrowing costs rocketed and Spain's recession deepened.

Economy Minister Luis de Guindos said there was no need for a financial rescue despite an "enormous uncertainty and volatility in the markets."

He called on the European Central Bank (ECB) to intervene, saying the situation was beyond the control of governments. However, ECB president Mario Draghi had said over the weekend that the central bank did not "solve (individual) states' financial problems."

Meanwhile in Brussels, European Competition Commissioner Joaquin Almunia told Spanish media that Madrid did not need a rescue.

"I think not," the commissioner said, stressing Spain's capacity to emerge from the crisis through reforms it was undertaking.

However, Almunia recommended that European rescue funds intervene in debt markets.

Spain's borrowing costs soared early Monday, with the yield for 10-year bonds rising past 7.5 per cent. Seven per cent is regarded as the level above which Spain cannot afford to obtain financing in the long term.

The spread measuring the difference between Spanish and German 10-year bonds went up to a record 642 basis points.

Spain's gross domestic product contracted by 0.4 per cent between April and June, compared to 0.3 per cent in the previous quarter, the Bank of Spain said.

The government expects the economy to shrink by 1.5 per cent this year, according to a forecast issued last week. Many analysts, however, expect a contraction of about 2 per cent.

Analysts attributed the rising bond yield partly to reports that three of Spain's 17 semi-autonomous regions were considering seeking a financial rescue from the government. The eastern region of Valencia has already done so.

A liquidity fund worth 18 billion euros (22 billion dollars) was set up last week to help highly indebted regions. The regions are largely responsible for Spain's budget deficit, which amounted to 8.9 per cent of gross domestic product in 2011.

The government is trying to trim the deficit to 6.3 per cent this year and to 2.8 per cent by 2014, as agreed with the EU.

Markets have not been calmed by a 65-billion-euro austerity package announced by the government, nor by a eurozone pledge to inject up to 100 billion euros into Spain's ailing banks.


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Source: Copyright 2012 dpa Deutsche Presse-Agentur GmbH


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