Spain on the brink with unemployment rise, downgrade

Spain’s economic woes deepened alarmingly on Friday as the government revealed that unemployment rose to nearly 25%, the highest in almost two decades, a day after a credit ratings agency downgraded the country’s debt and warned it faces an uphill battle to get a grip on its finances.

Investors sold off Spanish bonds in a show of jitters.

Official figures showed that unemployment has jumped to 24.4% in the first quarter of 2012 — the highest rate in the 17-country eurozone — from 22.9% in the fourth quarter of 2011.

The data showed 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 rate for people under 25 year is now 52%, up from 48.5% in the previous quarter.

“The figures are terrible for everyone and terrible for the government,” Foreign Minister Jose Manuel Garcia-Margallo told Spanish National Radio. “Spain is in a crisis of enormous magnitude.”

A figure of 24% unemployment was expected but not so early in the year.

The country is now in its second technical recession in three years.

To prepare for such a steep economic downturn, businesses have been laying people off at a faster rate than expected, said IESE Business School economics professor Antonio Argandona.

Argandona said Spain is not now at risk of needing a bailout because its government is still solvent, but it and other countries are indirectly being helped over the short term by cheap loans from the European Central Bank. Spanish banks are taking the money and using it to buy the government’s high-yield bonds.

But even if the economy returns to growth next year as forecast, the jobless rate will lag behind and unemployment could hit 26%, he added.
The current rate is the highest since 1994, when it reached 24.55%.

The total number of unemployed increased by 729 400 compared with the first quarter of 2011. The National Statistics Institute said Spain now has 1.7-million households in which no one has work.

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 this 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 epicenter Europe’s debt crisis in recent weeks as investors worry over Spain’s ability to push through austerity measures and reforms at a time of recession and mass unemployment.

The cuts are aimed principally at slashing the government’s deficit from 8.5 percent of economic output to the maximum level set by the European Union of 3 percent by 2013. For this year the goal is 5.3 percent.

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 euro ($2.5 trillion), more than double Spain’s 734 billion euro.

The Spanish government acknowledges that labor reforms enacted to loosen up rigid laws on hiring and firing will not make a dent in the jobless rate until next year.

The mood among Spanish people out on the streets Friday was downcast.

“The situation is very bad. There’s no work,” said Enrique Sebastian, a 48-year-old unemployed surgery room assistant as he left one of Madrid’s unemployment offices.

“The only future I see is one with wages of 400 euro ($530) a month for eight-hour days. And that’s if you can find it,” said Sebastian.
Graphic artist Fernando Garcia, 41, said he had just been laid off again.

“I’ve been on short-term contracts for a long time without any type of stability,” he said. “I work a few months and then I have to go on the dole. But I have to be optimistic. I have no choice.”

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 main IBEX index, having fallen more than 1 percent earlier, recovered and was up 1.8 percent at midday. The yield on the country’s ten-year bond was up 0.14 of a percentage point to 5.93 percent, having touched 6 percent earlier.

Though the yield is below the 7 percent rate widely considered unsustainable in the long-run, it’s edged up over the past month from below 5 percent in a clear sign investors are fidgety over its 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. “More than anything else, this is the result of the deeply flawed and self-defeating approach to the euro crisis that EU leaders have embarked on.” — Sapa-AP


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