Spanish markets take breather after sharp losses

By Ciaran Giles

Associated Press

Published: Wednesday, April 11 2012 4:50 a.m. MDT

A broker sits in the stock exchange in Madrid Tuesday April 10, 2012. Worries about Spain's finances intensified Tuesday, when the country's bond yields on international markets rose despite expectations of a new round of austerity measures. The Spanish government is under intense pressure to show it can rekindle economic growth and cut its budget deficit to avoid becoming the next eurozone country to need a bailout, while the joblessness rate is 23 percent and the economy is shrinking

Paul White, Associated Press

Enlarge photo»

MADRID — Spanish financial markets were on alert for further disruption Wednesday, as the country's borrowing costs edged lower after soaring this week on fears the country might need a bailout.

The yield — the interest rate a country pays to borrow on the international debt markets and an indication of risk — for Spain's 10-year bonds in the secondary market dropped back to 5.87 percent, still close to Tuesday's four-month high of 5.93 percent and the levels that pushed Ireland, Portugal and Greece to seek a bailout.

Concern is growing over Spain's ability to cut its national debt and lift its stagnating economy out of recession at a time when unemployment is nearly 23 percent. Investors are also focusing on the lack of budgetary discipline in the country's debt-burdened regional governments and whether Spain's saving banks, crippled by bad property loans, will need further injections of capital to save them from collapsing.

The country's new right-leaning Popular Party government has introduced a series of labor and economic reforms aimed at convincing investors and the European Union that Spain can slash its public deficit from 8.5 percent of its economic output to the EU-set maximum of 3 percent next year and will not follow the path of Greece, Ireland and Portugal in seeking a bailout.

Speaking to reporters in Parliament, Prime Minister Mariano Rajoy said Spain's situation was "difficult and complicated."

"The government's economic policies are tough and costly and will not produce results in the short term but they are what we have to do in these moments," said Rajoy.

He said that Spain had overspent by €90 billion ($118 billion) last year.

"We have to ask (creditors) for this and if they don't give it to us it puts us in a difficult position," he said.

The Ibex 35 stock index in Madrid was up 1.4 percent after shedding 3 percent Tuesday.

Adding to the country's woes are international investors' increasing reluctance to own risky investments, such as government bonds from Spain and other debt-laden countries such as Italy — whose yield on its 10-year bond was 5.50 percent Wednesday, down from 5.7 percent on Tuesday.

The economies of Italy and Spain are the third and fourth largest in the 17-country eurozone after Germany and France and there is mounting concern that the single-currency union would not be able to afford to bail out Madrid or Rome if they asked for assistance.

Analysts say investors need to see the reforms in action and whether Spain's regional governments reigning in spending and applying cutbacks.

The pressure on Spain's finances comes as part of a drop of confidence in global financial markets following weak U.S. economic data last week. Spain's Economy Minister Luis de Guindos said the problem was not so much to do with Spain as with investors' worries over poor economic growth across Europe.

Rajoy's government came under attack Wednesday from opposition parties in a weekly parliamentary question session.

Leading opposition Socialist party leader Alfredo Perez Rubalcaba said the government's draft austerity budget with €27 billion ($35.4 billion) in tax hikes and spending cuts budget would "only worsen the recession."

In Berlin, German Finance Ministry spokesman Johannes Blankenheim noted that Spain "has carried out wide-ranging reforms in many policy areas."

"We regret it that the markets so far are not appropriately rewarding these enormous reform efforts," Blankenheim said.

The rise in bond yields in Spain and Italy are also being seen as signs that the market-calming effects of a massive credit infusion by the European Central Bank are wearing off. The ECB made just over €1 trillion in emergency three-year loans to banks in two batches on Dec. 21 and Feb. 29.

The ocean of cheap credit removed fears of sudden bank failures, and eased borrowing for indebted governments as some banks used the cheap loans to buy higher-yielding government bonds. Bank officials have stressed that the measure was aimed at supporting banks — not governments — and that governments needed to use the respite to fix the eurozone's underlying debt problems.

Benoit Coeure, a member of the ECB's top executive board, underscored that message in a speech in Paris Wednesday, saying that while ECB measures have helped avoid a credit cutoff to the economy the situation "remains fragile."

"Governments must build on the steps already taken to restore sound fiscal positions and support long term growth," he said.

David McHugh from Frankfurt and Geir Moulson from Berlin contributed to this report.

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