Spain's recession deepens further

The economic woes of Spain are not letting up, as GDP shrinks further in the second quarter.

by Michael Northcott
Last Updated: 19 Aug 2013

The endless talks, summits and bailouts do not seem to be stemming the crisis in Spain as the country’s national statistics body, INE, today reported a 0.4% GDP contraction in the second quarter. This is on top of the 0.3% contraction in the first three months of 2012, and along with record unemployment of around 26%, means the country is likely to remain in recession well into 2013.

Spain is on a highway to hell even without the disappointing GDP figures. Last week, the cost of borrowing for the Spanish government rose to 7.6% on 10-year bonds, the highest yield seen on any government bonds since the introduction of the euro currency. The bonds predicament has improved slightly since the European Central Bank announced last week that it would ‘do whatever it takes’ to keep the euro afloat – yields fell to 6.55%. A welcome improvement given that 7% is the threshold at which lenders start to get seriously worried about getting their money back.

But the country’s difficulties do not stop at recession and bond yields. By last week, at least two regions in Spain had had to go to the central government asking for domestic bailouts, with six others expected to follow. Murcia and Valencia are running so low on cash that they fear they will not be able to pay normal bills for public services. Spanish regions are financially autonomous, but are locked out of international debt markets, so the central government is their last-chance saloon and the only way they can get their hands on extra cash. 

Closer to home, it was announced this morning that the credit ratings agency Standard and Poor’s will be maintaining the AAA rating for the UK, which is an achievement considering even Germany has just been put on a negative outlook. Chancellor George Osborne will no doubt hail the announcement as a triumph considering the UK’s economy contracted by another 0.7% in Q2, and S&P’s even put its weight behind the government’s deficit reduction programme.

Preventing any complete collapses is now the EU’s priority, and various European institutions have agreed on bailouts for Spain’s ailing banks to make sure the whole economy does not go into freefall – a sovereign bailout will no doubt be needed pretty soon, too. But Merkel and Hollande came forward last week, promising that the euro will be kept alive at all costs, and the tough conditions Europe insisted on for Greece to get its bailout, have now been agreed by Greek politicians. Hopefully this rules out the possibility of a Grexit, which seemed a real possibility just a few weeks ago. 

How much more money will be spent keeping countries afloat artificially is a decision for the Euro-gods in the mysterious inner-sanctum of Brussels. The rest of us can only watch and wait…

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