July 21, 2012 in Business

Bailout fails to ease fears for Spain

Don Melvin And Daniel Woolls Associated Press
 
Associated Press photo

Women walk past posters offering discounts in Barcelona, Spain, on Friday. The country is in its second recession in three years.
(Full-size photo)

BRUSSELS – Concerns about Spain’s crippling financial problems flared again Friday as news that the country had been given the final go-ahead for a bank bailout loan of up to $122.9 billion failed to take the sting out of a further round of bad economic news.

Earlier Friday, finance ministers from the 17 countries that use the euro unanimously approved the terms for a bailout loan for Spain’s banks, which have been struggling under the weight of toxic loans and assets from the collapse of the country’s property market. Investors have been fighting shy of Spain for months, worried that the country could not keep control of its deficit during a recession while supporting its stricken financial sector.

Spain is the 17-country eurozone’s fourth-biggest economy, and many market-watchers fear that if it asked for a bailout, the rest of the region could not afford to foot the bill. The country and its banks were also locked in a vicious debt spiral, where the shaky banking system has been propped up by the indebted government so that the banks could buy more government debt. The loan facility agreed to on Friday was designed to break that spiral.

The bank agreement came as Spain cut its growth forecast and one of the country’s heavily indebted regions asked for help. The news sent the country’s borrowing costs soaring and its stock prices plummeting. In afternoon trading, Spain’s main IBEX index was down almost 6 percent while the interest rate on the country’s 10-year bond – an indicator of investor confidence in a country’s ability to manage its debt – was at 7.2 percent. This is a rate that many market-watchers consider is too high a price for a country to pay in the long term.

Treasury Minister Cristobal Montoro on Friday forecast Spain’s recession will drag on into 2013, although the economy will not be quite as weak as it is now. According to the latest figures, the country’s gross domestic product is expected to contract 0.5 percent in 2013, compared with the previous forecast for it to grow by 0.2 percent.

Unemployment, which is now at 24.4 percent, will remain about the same next year, Montoro said.

Meanwhile, the economy will shrink 1.5 percent this year, a slight improvement from the 1.7 percent drop previously predicted, he added.

The government this week passed painful austerity measures – tax hikes and cuts to benefits, salaries and pensions – to reduce state debt and strengthen confidence in its finances.

Across Europe, markets tumbled on concerns about Spain. In France, the CAC 40 index dropped 2.14 percent while the German DAX index was off 1.9 percent. The euro fell to a two-year low of $1.2165.

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