Capital flees Spain as spending crumbles

Capital flight from Spain gathered pace in May with the rescue of one of the country’s biggest banks and crumbling consumer demand saw retail sales chalk up two straight years of declines in June.

Outflows rose to €41.3 billion, Bank of Spain data showed yesterday, as the government stepped in to prop up Bankia.

That dealt a further blow to already fragile investor confidence and triggered a European rescue worth up to €100 billion for the country’s lenders.

In all €163 billion – equivalent to around 16 per cent of economic output – left Spain between January and May, with domestic banks sending money abroad, foreign banks pulling out cash and mostly non-resident investors dumping domestic assets.

Spain’s struggling economy, which is expected to remain in recession well into next year, is at the centre of the eurozone debt crisis, and rising refinancing costs risk shutting the country out of international markets. Domestic demand has stalled since the crisis started four years ago, hitting the key service sector which accounts for around 70 per cent of the economy, while sky-high unemployment rates have further eroded consumer confidence.

Spanish retail sales fell by 5.2 per cent year-on-year on a calendar-adjusted basis in June, separate data showed yesterday, marking a 24th straight month of declines.

“These figures are proof that the Spanish economy continues in recession and a drop in retail sales could indicate a GDP contraction of around two per cent this year,” economist at Madrid broker M&G Valores Nicolas Lopez said.

Madrid requested help from Europe in June to recapitalise its banks, battered by the collapse of a decade-long real estate bubble in 2008 but the plan failed to calm investors for more than a few days.

Yesterday’s data showed domestic banks moved €31.9 billion out of the country in May. The headline figure compared with total outflows of €26.6 billion in April and a peak of €66 billion in March.

The premium investors pay to buy Spanish over German debt was at around 532 basis points yesterday, far below last week’s euro-era highs on hopes the European Central Bank will announce measures to help the beleaguered market.

Plummeting domestic demand was reflected in May current account data also published yesterday by the central bank and showing a deficit of €754 million, narrowing sharply from €3.4 billion in the same month of 2011. The gap shrank on a lower trade deficit as exports rose against falling imports, and a lower primary income deficit – the difference between money paid abroad and money received.