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A record drop in retail sales added to Spain's economic woes on Tuesday as the government struggled to increase confidence in the crippled banking industry and investors remained wary of the country's ability to manage its debt.
Retail sales dropped 9.8 percent year-on-year in April as the country battled against its second recession in three years and a 24.4 percent jobless rate that is expected to rise. The fall in sales was the 22nd straight monthly decline, and was more than double the 3.8 percent year-on-year fall posted in March, the National Statistics Institute said Tuesday.
A gloomy Bank of Spain report heaped more bad news on the government. The central bank said it predicts the economy will keep shrinking at least until the end of June, after contracting 0.3 percent in the first quarter. The government has predicted a 1.7 percent contraction for the whole of 2012.
The conservative government has introduced harsh austerity measures, including spending cuts on health and education, in an attempt to control the level of its debt relative to the size of its economy. It is also trying to reassure investors worried that the woes of the banking sector will force the country to require a bailout like those take by Greece, Ireland and Portugal. Spain's lenders have a large amount of unpaid, so-called "toxic", loans on their books following the collapse of the country's real estate bubble in 2008. There is a concern that Spain's government will not be able to find the funds to prop up the sector and keep its economy afloat.
The interest rate, or yield, on Spanish 10-year-bonds hit Tuesday to 6.41 percent -- a sign that investors are turning away from Spanish debt. Meanwhile, the spread between Spanish bonds and safe haven German bunds remained at 5.04 percentage points. The IBEX stock index was down a further 1.5 percent by late afternoon in Madrid.
Late last week Bankia, the nationalized lender and Spain's fourth-largest bank, announced it would need a further (EURO)19 billion ($23.88 billion) in state aid to shore up its defenses against losses from its toxic loans. News of the bailout, and concerns over how the government would raise the money, sent Spain's main IBEX 35 stock index down to a nine-year low Monday and the borrowing costs up to a dangerously high level.
In an attempt to calm concerns, Prime Minister Mariano Rajoy gave an impromptu press conference Monday, insisting yet again that Spain's banking sector would not need a bailout.
Bankia resulted from a merger of seven regional savings banks, known as cajas, which bore the brunt of the collapse in property prices.
Another three cajas said Tuesday they were considering a merger. Liberbank, Ibercaja and Cajatres said in statements to the Madrid stock exchange their boards would meet later in the day to assess the merits of pooling their resources.
Late Monday evening, Bankia's parent company restated its 2011 results to reflect a (EURO)3.3 billion ($4.15 billion) loss as opposed to a (EURO)41 million profit.
BFA, or Banco Financiero y de Ahorros, said in a statement that about half of this revised amount stemmed from losses at Bankia, with another (EURO)1.6 billion in losses booked from an adjustment of expected tax deductions, which the company had previously recorded as assets. It said the profit recalculation was prompted by the nationalization.
Bankia's exposure to toxic real estate assets is now calculated at about (EURO)40 billion, as opposed to the most recent total of (EURO)32 billion.
The government is hoping to recapitalize Bankia by issuing new debt on the market, a spokesperson for the Economy Ministry said Tuesday. "That's the first option, for sure," the official said under departmental rules of anonymity.
The government plans to unveil details of the Bankia refinancing plans, and of how the Treasury intends to deal with heavy debts built up by the country's regional authorities, on Friday, the official said.
The Spanish Treasury, meanwhile, announced it is unfreezing (EURO)510.5 million in funds earmarked for the Andalucia regional authority. The government blocked the payment after doubts emerged over whether Andalucia would abide by a commitment to control expenditure. The Treasury said in a statement it was releasing the funds after a written undertaking from the Andalucia government to comply with spending plans previously agreed with Madrid.
Barry Hatton contributed to this story from Lisbon, Portugal.