Spain’s downward spiral spooks bond investors

Spain lost almost 200,000 jobs in January in the worst one-month rise since records began, lifting the unemployment rate to 14.4pc and inflicting further damage on the credibility of the Spanish government.

The ferocity of the downturn has led to a sharp jump in borrowing costs for the Spanish state, which lost its AAA credit rating from Standard & Poor’s last month.

A €7bn treasury auction of 10-year Spanish bond on Tuesday saw yields jump to 137 basis points above German Bunds, a post-EMU high. Foreign investors were conspicuously absent, leaving Spanish banks to soak up the debt.

“This is a national emergency. The government is being overwhelmed by events,” said Mariano Rajoy, the opposition leader. The mood has changed dramatically in recent weeks as debtors launch hunger strikes and one builder threatened to set himself on fire to protest the credit crunch.

Maravillas Rojo, the labour secretary, said four million people may be out of work by end of the year – up from 3.3m now. “We’re suffering from a grave international financial crisis, lack of liquidity, and falling consumption,” she said.

Spain is losing jobs at three times the rate of the US, in proportionate terms. Over one million Spanish men under thirty are unemployed, leading to a surge in applications to join the armed forces. Three quarters of the army candidates are being turned away.

Industry minister Miguel Sebastian has launched a “Made in Spain” drive, exhorting the nation to buy Spanish clothes and to take ski holidays in the Sierra Nevada instead of the Alps. He claimed that 120,000 jobs can be saved if every citizen spends €150 less this year on imports.

The campaign amounts to a partial boycott of foreign products and may breach EU law. It is the sort of protectionist reflex becoming visible daily in much of the world.

Mr Sebastian blamed the banks for causing the crisis by tightening credit. “We’re losing our patience,” he said.

But the banks themselves are coming under strain – even though they have held up better than Anglo-Saxon and German banks so far. Bad loans have reached 3.5pc and are expected to surpass the 8pc peak seen in the crunch of the early 1990s.

“Banks have closed the tap,” said Jesus Barcenas, Spain’s small business leader.

Finance minister Pedro Solbes says there is almost nothing Madrid can do to halt the downward spiral. “We have exhausted our margin for manoeuvre,” he said.

While he has avoided blaming Spain’s euro membership for the country’s plight, there is no question that Spain’s failure to adapt to the rigours of EMU is at the root of its structural crisis.

S&P said euro membership had become part of the problem since it prevented the country resorting to aggressive monetary stimulus to counter the housing crash, or from devaluing to restore competitiveness.

Spain has become trapped after letting wage costs rise faster than German and French costs for year after year, leading to a current account deficit of 10pc of GDP. The socialist government of Jose-Luis Zapatero has so far recoiled from imposing the necessary remedy of wage deflation. It may be forced to do so by the bond markets.

By Ambrose Evans-Pritchard
Last Updated: 6:08PM GMT 03 Feb 2009

Source: The Telegraph

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