Spain yesterday denied it needed a full international bailout as the economy shrank even faster and its long-term borrowing costs jumped to dangerous highs.
The Bank of Spain said the economy contracted 0.4 per cent in the second quarter, worse than the 0.3 per cent of the first, citing the impact of the debt crisis on consumer spending and confidence.
On Friday, the government said the recession would continue next year, instead of end with modest growth as it had previously forecast.
The bad data compounded Madrid’s pressing problems, chief among them how to cut an unprecedented unemployment rate of more than 24 per cent while stabilising a stricken banking system and the public finances.
Financial markets have turned increasingly against Madrid in recent weeks after an initial positive reaction to a massive €65 billion austerity package turned sour, with each new initiative failing to hold the line.
In early afternoon trade, the yield – the rate of return investors earn – on the benchmark Spanish 10-year government bond jumped to 7.487 per cent from 7.225 per cent on Friday, well above the seven per cent danger level for long-term funding.
“There are fears that Spain is edging closer to being forced to seek a full-scale bailout,” said Joshua Raymond, chief market strategist at City Index traders.
Borrowing costs for other struggling eurozone states were also under pressure as the debt crisis returned with a vengeance despite an EU bank rescue deal worth up to €100 billion for Spain which was finalised on Friday. The Italian 10-year bond yield jumped to 6.357 per cent from 6.149 per cent.
Any yield over six per cent is widely seen as unsustainable for long-term funds, with seven per cent the level at which Greece, Ireland and Portugal had to ask for outside help from the EU and International Monetary Fund.
Spanish Economy Minister Luis de Guindos insisted yesterday that the country did not need a full bailout but noted that the crisis appeared more than any one state could cope with.
“Spain is a solvent country and this solvability will allow us to get through the difficulties we are facing right now,” the minister said.