POLITICS

Spain economic crisis deepens with jobless rise; S&P downgrades country's debt

04/27/2012 02:11 EDT | Updated 06/27/2012 05:12 EDT
MADRID - The hole in Spain's economy is getting deeper.

The government reported Friday that unemployment rose to 24.4 per cent in the first quarter — compared with 22.9 per cent in the fourth quarter — and that more than half of Spaniards under 25 are now without jobs.

The bleak employment came one day after ratings agency Standard & Poor's downgraded the country's debt.

The Spanish economy is in recession for the second time in three years as the damage from a housing bust persists. Foreclosures are rising, Spain's banks are in worse financial shape and the government's deficit is hitting worrisome levels.

The first-quarter employment data showed that 365,900 people lost their jobs, bringing the number of unemployed Spaniards to 5.6 million. The unemployment rate for people under 25 climbed to 52 per cent, up from 48.5 per cent 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."

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

The figures were another blow to the conservative government of Mariano Rajoy after Standard & Poor's late 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 of 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 per cent of economic output to the maximum level set by the European Union of 3 per cent by 2013. For this year the goal is 5.3 per cent.

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.

The government later Friday released a flurry of upbeat data on how it plans to turn the economy round between 2012-2015. Despite the dismal job numbers, it predicted a roughly balanced budget in 2016.

But there was more pain, too. De Guindos announced an increase next year in indirect taxes. He said this measure will raise €8 billion ($11 billion) in new revenue to help chip away at a bloated deficit. At a press conference late Friday he detailed that the increment would affect sales tax on purchases and the sale of fuel, tobacco and alcoholic drinks.

The conservative government has already raised income and property taxes, and announced cuts in spending on health care and education. The forecast is for the economy to shrink 1.7 per cent this year.

Foreseeing the economic downturn, businesses have been laying people off at a faster rate than expected, said IESE Business School economics professor Antonio Argandona. New laws also make it easier for companies to shed workers at low cost.

Argandona said Spain is not now at risk of needing a bailout because its government is still solvent. But even if the economy returns to growth next year as forecast, the jobless rate will lag behind and unemployment could hit 26 per cent, he added.

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 ($530) a month for eight-hour days. And that's if you can find it," said Sebastian.

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 per cent earlier, recovered and was up 1.7 per cent by close of trading Friday. Meanwhile investors sold off Spanish bonds in a show of jitters. The interest rate, or yield, on the country's ten-year bond was up 0.07 of a percentage point to 5.87 per cent, having touched 6 per cent earlier.

Though the yield is below the 7 per cent rate widely considered unsustainable in the long-run, it has edged up over the past month from below 5 per cent in a clear sign investors are fidgety over its economic prospects.

Gayle Allard, a labour market expert at IE Business School, said that while a jobless rate of 24.4 per cent is terrible, Spain is traditionally a high unemployment country. Three times in the past 30 years it has exceeded 20 per cent, Allard said.

"It is something that, somehow, they live with. Things go underground. I don't know what they do. They hide money in good years and they pull it out in bad years," Allard said.

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Pylas contributed from London. Ciaran Giles, Jorge Sainz and Harold Heckle contributed from Madrid.