Bloomberg News

Spanish Economy Enters Second Recession, Bank of Spain Says

March 27, 2012

Spain’s economy is suffering its second recession since 2009, the Bank of Spain said, a development that obstructs the government’s efforts to reorder public finances as it prepares the budget for this year.

“The most recent information for the start of 2012 confirms the prolongation of the contraction in output,” the Madrid-based central bank said in its monthly bulletin today.

Spain’s gross domestic product declined 0.3 percent in the fourth quarter of last year, less than two years after emerging from the last recession. Prime Minister Mariano Rajoy will present his 2012 budget on March 30, amid growing pressure from investors and European peers to rein in the deficit, which was 8.5 percent of GDP last year.

The spending plan, his first since coming to power in December, won’t increase tax on consumption nor cut civil servants’ salaries, Rajoy said today in Seoul. The previous administration slashed wages of public workers by an average 5 percent in 2010.

Rajoy, who leads the pro-business People’s Party, hasn’t said where he will cut spending, even as he pledged today to present a budget that is “very austere.”

Concern about the country’s ability to tackle the euro area’s fourth-largest budget deficit hurt demand for Spanish notes at an auction today as the Treasury sold less than its maximum target of 3 billion euros.

Bond Yields

The yield on Spain’s 10-year benchmark bond was 5.356 percent at 1:40 p.m. in Madrid, 14 basis points lower than a 12- week high of 5.494 percent reached on March 22.

Spain is considering allowing regional governments to issue debt jointly to save 1 billion euros a year in borrowing costs and enable the regions to regain access to funding, Economy Minister Luis de Guindos said today.

Spain’s three largest regions, Catalonia, Valencia and Andalusia, that together account for 42 percent of its economy, are shut out of financial markets. The spread between Catalan and Spanish debt maturing in 2020 was more than 4 percentage points today.

De Guindos said the country’s economic situation will remain “very difficult” until the end of the first half. The government forecasts a stabilization after the second quarter and some improvement by the end of the year, he said.

To contact the reporters on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net; Angeline Benoit in Madrid at abenoit4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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