Recessionary Spain is hit by investor fears

 
Julian Harris
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SPAIN’S economic prospects endured a miserable day yesterday, as a wave of negative news coincided with doubts being poured on the public finances of several key regions.

The Eurozone’s fourth largest economy contracted by 0.4 per cent in the third quarter of the year, its central bank said, leaving the country potentially facing a whole year of recession throughout 2012.

“With output falling, the government is likely to miss its fiscal targets by a wide margin,” commented Daiwa Capital in a note, citing reports that the country’s budget deficit may reach 7.3 per cent of GDP, higher than the target of 6.3 per cent.

The indebted national Spanish government’s 10-year yields rose around 13 basis points to over 5.62 per cent yesterday, after credit rating agency Moody’s downgraded five regional states, including Catalonia.

Worries over Spain contributed to a weakening of the euro, which fell as low as $1.295, its lowest since 16 October. “The Moody’s decision to downgrade a number of Spain’s cash-strapped regions is hitting currency markets as a genuine reality check today,” said Western Union’s Nawaz Ali. “Optimism that any bailout for Madrid would be pretty stress-free seems to be overdone.”

The central region of Madrid, meanwhile, pulled a scheduled sale of €710m worth of its debt, saying it will wait for stronger investor demand in order to “print a larger transaction” at some stage in the future.

Yet Spain nonetheless managed to sell €3.53bn of short term debt yesterday morning.

Three-month paper sold at an average of 1.4 per cent, up from 1.2 per cent, while six-month notes actually saw their yield ease from 2.2 per cent to two per cent.