WORRIES ABOUT Spain’s perilous economic outlook and the threat it poses to its fragile euro zone neighbours intensified last night as investors dumped the euro and riskier government bonds ahead of the Easter holiday.
A poorly received Spanish bond auction earlier in the week continued to spread jitters around Europe, with economists warning Spain could become the latest flashpoint in the sovereign debt crisis.
The IMF fanned those fears by asserting that Spain was facing “severe” challenges. It insisted last week’s strict budget must be put into practice, with Spain meeting EU demands for it to cut its deficit.
The euro fell to a three-week low against the dollar on concerns about repercussions for the wider currency zone from problems in Spain, whose economy is twice the size of that of Ireland, Greece and Portugal combined.
The IMF’s remarks concluded a week of gloomy news from Spain in which the government conceded its debts would balloon this year to their highest level for two decades.
That provided a tough backdrop to the country’s latest bond auction, and the sale came in at the low end of the government’s target range. To placate fears that it might eventually become the fourth euro zone country to require an international bailout, the government had to offer investors an interest rate of 5.338 per cent on debt maturing in 2020 – higher than the 5.2 per cent forecast and the 5.156 per cent offered when the debt was last sold in September 2011.
Economists have highlighted the widespread challenges Spain faces from the highest unemployment rate in Europe, with youth unemployment at 50 per cent, rising borrowing costs, stretched local authorities and a troubled banking system. The European Central Bank has sought to keep borrowing costs in euro zone states in check by injecting funds into financial markets in the hope banks will use them to buy bonds. However bond market experts say the effects of the so-called LTRO scheme are wearing off, leaving Spain particularly vulnerable.
“The impact of the LTRO has faded, meaning Spanish banks maybe are not as willing or able to take down large chunks of Spanish debt at every auction,” said Chris Iggo at AXA Investment Managers. – (Guardian service)
