Wary investors pushed up Spain's borrowing costs on Wednesday as a debt downgrade from last week cast a shadow over the country's efforts to avoid a Greek-style debt crisis. Good news on the jobs market seemed to give markets little cheer.
The spread — the difference in the interest rates between the Spanish bond and its German equivalent — reached 176 basis points, or 1.76 percentage points, at midday Wednesday.
The figure is a key indicator of how risky markets think Spain is. The bigger the spread, the less confidence in Spain's government finances. The record spread had been 164 points on May 7, but that was surpassed Tuesday when it reached 173. As recently as April, the spread was as low as 100 basis points.
The good news was that the number of people seeking unemployment benefits in Spain fell by more than 76,000 in May as companies started hiring for the summer tourism season, the Labor Ministry said. It was the second straight monthly decline and the largest drop for the month of May since 2005, the Labor Ministry said.
But over the past 12 months the number of people seeking benefits has increased by 12.3 percent, or 446,063, to a current total of 4,066,202, and markets appeared inclined to discount the ray of sunshine when compared to larger troubles looming over the country.
Spain is struggling to crawl out of recession after the collapse of its construction sector, which had driven more than a decade of economic growth. The economy grew by 0.1 percent in the first quarter, after six quarters of decline.
The government is facing the twin ills of a moribund economy and pressure from the EU and other overseers to cut spending so as to reduce an oversized deficit and steer clear of a Greek-style debt crisis. Greece was shut out of borrowing markets and had to seek a bailout from the European Union to avoid a default.
Governments across Europe are struggling to get a grip on heavy debt loads in a crisis that has undermined the shared euro currency. The EU has agreed to put up $1 trillion in loans and guarantees to backstop government that get into financial trouble. While that has eased fears of an immediate crisis, long term worries remain about the continent's growth prospects and the health of its banks, which hold large amounts of Greek debt.
Spain's overall unemployment rate is released separately by the National Statistics Institute and now stands at just over 20 percent, the highest in the euro zone.
The government of Prime Minister Jose Luis Rodriguiz Zapatero is struggling politically because of the crisis. Parliament last week approved its key 15 billion euro ($18 billion) package of spending cuts by a bare one-vote margin.
The Socialist government later said this belt-tightening had forced it to revised downward its forecasts for economic growth and job creation for the next few years.
On Friday, Fitch Ratings gave Spain the second downgrade of its credit rating in a month. The agency said the government's deficit-cutting drive would weigh on economic growth.
That downgrade and word from the government that it is giving unions and management at least another week to reach an agreement on crucial labor market reforms has seen the spread on 10-year Spanish bonds rise to record levels this week.
Loosening up Spain's rigid labor market is seen as critical for Spain to create jobs, resume economic growth and reassure markets that it will have no problem paying off its debt.
"A light reform would be a severe blow to the country's credibility and have a very negative impact on the Spanish stock market," said Link Securities, a Madrid brokerage.
The good news on jobless claims was not entirely unexpected. Such claims tend to fall in Spain in May as companies get ready for summer tourism; this time last year they went down by 24,000.
Deputy Labor Minister Maravillas Rojo welcomed Wednesday's figure as good but noted the hardship endured by the 4.6 million people in Spain who are out of work.
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