Investors worry as Spain dives back into recession

Tim Wallace
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Sain's economy minister yesterday admitted the country is back in recession, as the government’s borrowing costs climbed to levels last seen before the European Central Bank’s €1 trillion (£836bn) rescue operation in December.

Madrid has taken steps to clamp down on regional governments’ rampant budget deficits, only offering credit lines in return for promises to curb spending.

However, increasing worries about the state of the economy have boosted fears that the government will fail to cut its budget deficit to the 5.3 per cent Prime Minister Mariano Rajoy is aiming for.

“At the moment I see a first quarter with a similar pattern to the last quarter of last year,” said economy minister Luis de Guindos, indicating a second consecutive quarterly GDP contraction of 0.3 per cent, taking the country into official recession territory.

When Rajoy was elected at the end of November, his promises of fiscal discipline brought the country’s borrowing costs down from highs of 6.7 per cent to lows of 5.1 per cent on 10-year bonds, before falling even further when the ECB pumped Europe’s banks full of cheap cash.

But that bounce has evaporated. Yields hit 6.15 per cent yesterday, as investors began panicking once more.

“We’re back in full crisis mode,” said Rabobank rate strategist Lyn Graham-Taylor. “It is looking more and more likely that Spain is going to have some form of a bailout. Assuming there is not an ECB intervention you would not see a cap on Spanish yields, they would just keep increasing.”

Meanwhile, a study out today showed 67 per cent of fund managers expect Greece to need more assistance within a year, and just 13 per cent believe the Eurozone’s new fiscal treaty will prove strong enough to reassure markets and stop contagion.

“People are becoming more and more sceptical when politicians say contagion is not going to happen as we’ve seen so much in the past,” warned Capital Spreads’ Simon Denham, who carried out the research. “Continual claims a year ago that Greece would not need any more bailout money turned out to be pure fiction, so when political leaders say this new treaty will prevent the debt contagion, investors take such comments with a bucket load of salt.”