Spain’s economic problems were put in sharp relief yesterday as figures showed unemployment rising to near 25 per cent, a day after a credit ratings agency downgraded the country’s debt rating and warned it faced an uphill battle to get a grip on its finances.
Official figures showed that unemployment has jumped to 24.4 per cent in the first quarter of 2012 — the highest rate in the 17-country Eurozone — from 22.9 per cent in the fourth quarter of 2011. The data show that another 365,900 people lost their jobs in the first three months of the year, taking the total unemployed to 5.6 million.
The figures were another blow to the conservative government after Standard & Poor’s late on Thursday became the first of the three leading credit rating agencies to strip Spain of an A rating. It cited a worsening budget deficit, worries over the banking system and poor economic prospects for its decision to reduce the rating by two notches from A to BBB”.
S&P even warned that a further downgrade is possible as it left its outlook assessment on Spain at “negative”. Spain, the Eurozone’s fourth-largest economy, is just now just three notches above so-called junk status. Earlier last week, the Bank of Spain confirmed that the country had entered a technical recession — two consecutive quarters of negative growth.
The country’s economic problems have become the epicentre Europe’s debt crisis in recent weeks as investors worry about Spain’s ability to push through austerity and reforms at a time of recession and mass unemployment.
With the economy shrinking and the population restless, there are concerns that the government will not meet its targets and will be forced into seeking a financial rescue as Greece, Ireland and Portugal have done before.
The difference is that Spain’s economy is double the size of the combined economies of the three countries that have already been bailed out. The other Eurozone countries would struggle to muster enough money to rescue it.
Even if the Eurozone finds the financial capacity to bail out Spain, economists warn the crisis could then envelop Italy, the Eurozone’s third-largest economy, which owes around €1.9 trillion (Dh9.3 trillion), more than double Spain’s €734 billion.
Markets in Spain initially reacted negatively to the twin news but soon recovered their poise alongside the rest of Europe as the downgrade was largely viewed as a belated acknowledgment of the market realities.
The yield on the country’s ten-year bond fell from an earlier high to trade only 0.10 percentage point higher at 5.89 per cent.
Though the yield is below the 7 per cent rate widely considered unsustainable in the long-run, it’s edged up over the past month from below 5 per cent in a clear sign that investors are getting increasingly fidgety over Spain’s economic prospects.
“Some will blame the downgrade for causing market unrest” instead it is merely a symptom of much deeper problems endemic in the Spanish economy and banking system,” said Sony Kapoor, managing director of Re-Define, an economic think-tank.