Spanish economy in deep crisis after credit downgrade
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 and Poor’s downgraded the government’s debt by two notches.
Unemployment shot up to 24 percent in the first quarter, one of the worst jobless figures in the developed world. Retail sales slumped for the twenty-first consecutive month as a recession cuts 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 and 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 euro zone 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 percent 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 percent this year, more than the government’s 1.2 percent forecast.
Spain’s country risk, as measured by the spread on yields between Spanish and German benchmark government bonds, spiked before leveling off to around 420 basis points.