Spanish debt downgraded amid 25% unemployment

Spain's economic plight has worsened after country's debt was downgraded, and unemployment is at its highest ever.

by Michael Northcott
Last Updated: 19 Aug 2013

A renewed sense of foreboding swept Europe this morning after credit rating agency Standard & Poor’s downgraded Spain’s sovereign debt, and new figures showed unemployment in the country is at its highest ever. 

The developments make depressing reading for Spaniards, especially since earlier in the week, the Bank of Spain announced that the country is back in recession. The Bank said the economy contracted by 0.4% in the first three months of 2012, having shrunk 0.3% in the final quarter of 2011. 

Compounding the misery, official figures show that the number of unemployed people in Spain rose to 5,639,500 at the end of the first quarter, having been expected to fall slightly. The number equates to around 25% of the country’s population. Almost 336,000 people lost their job in the first quarter alone. That’s the kind of figure, which if it doesn’t improve, could seriously threaten social and political stability. 

The markets have reacted as one would expect: bond yields have breached the sacred 6% barrier, meaning investor confidence in the country’s finances is falling dangerously low. The developments are important for the wider global economy in that if Spain can no longer borrow money it will need an expensive bailout from other eurozone countries, or may even be forced to default, dragging most of Europe’s highly leveraged banks and economies down with it. 

Standard & Poor’s was not all doom and gloom in its analysis, however. It said: ‘Authorities have implemented a comprehensive reform of the Spanish labour market, which we believe could significantly reduce many of the existing structural rigidities and improve the flexibility in wage setting.’ So there could be some hope for those unemployment figures.

It may sound like a positive caveat to investors, but on the ground, it is these very reforms that prompted violent protests in Spain in recent months – the cold, hard numbers are a red rag to a bull at the moment. Let’s hope nobody gets gored…

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