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Tags: Spain | Economy | output | Bailout

Spain’s Economy Shrinks for Fifth Quarter Amid Bailout Talk

Tuesday, 23 October 2012 11:27 AM EDT

Spain’s economy contracted for a fifth quarter, adding pressure on Premier Mariano Rajoy to seek more European aid even as the euro area’s fourth-largest economy met a bill sales target.

Gross domestic product fell 0.4 percent in the three months through September from the previous quarter, matching the contraction of the second quarter, the Bank of Spain said in an estimate in its monthly bulletin released in Madrid Tuesday. That compares with a median forecast for a 0.7 percent contraction in a Bloomberg News survey of 10 economists.

Spain’s bonds have declined since European Union leaders last week failed to discuss further aid for the nation at a Brussels summit. Rajoy has struggled to trim a 2011 budget deficit that was more than three times the EU limit, after the country’s deepening recession pushed the jobless rate over 25 percent, sapping demand and tax revenue.

“Progress isn’t conclusive, there is a huge amount of uncertainty in Spain right now,” said Ebrahim Rhbari, a London-based economist at Citigroup Inc. “There are question marks about the banking sector and public finances and economic fundamentals suggest we will see a bailout sooner than later.”

The euro depreciated, trading at $1.3031 at 12:27 p.m. in Brussels, down 0.2 percent on the day. The Stoxx Europe 600 Index dropped for a third day, falling 0.7 percent.

Spanish Bonds

Spain’s 10-year bond yield rose 8 basis points to 5.6 percent after the nation sold 3.53 billion euros ($4.6 billion) of three- and six-month bills, in line with its maximum target for the auction. That compares with an intraday record of 7.75 percent on July 25, a day after Spain signed a document fixing the conditions for a 100 billion-euro EU credit line for its banks. Even with those bond gains, Spain still pays 392 basis points more than Germany to borrow for 10 years.

The bill sale took place after Moody’s Investors Service lowered the credit rating on Catalonia, the biggest contributor to GDP, along with four other Spanish regions.

Spain itself is on the verge of junk territory, as Moody’s last week decided against cutting its credit-rating below investment grade while retaining a negative outlook. The country is rated one step above junk with Standard & Poor’s and two levels higher by Fitch Ratings.

ECB Purchases

For now, Rajoy is playing down the necessity of seeking additional aid as the country’s borrowing costs have dropped since the European Central Bank offered in August to buy bonds on the secondary market of countries that request aid from the euro-area rescue fund and agree to conditions.

Eurostat data released Monday showed Spain’s budget gap was 9.4 percent of GDP last year, the second-largest in the euro zone with Greece. Ireland had the highest budget deficit.

The European Commission will publish its assessment of Spain’s action to correct its deficit on Nov. 7, focusing on compliance with structural deficit goals rather than its nominal target, spokesman Simon O’Connor said yesterday.

Spain’s IEE, a research institute tied to the country’s main business lobby CEOE, Monday called on Rajoy to apply for support as soon as possible to improve companies’ and banks’ access to credit. The IEE said Spain should accept conditions for the aid and reduce spending on healthcare, pensions and unemployment benefits to help the economy recover.

‘Losing Access’

“Markets may eventually force Spain if it appears to be playing with time to avoid seeking aid altogether,” said Jesus Castillo, an economist at Natixis in Paris. “The danger of Spain losing access to markets is less now because everyone expects it to apply sooner or later.”

Spain’s economy probably contracted 1.7 percent in the third quarter from a year ago, as job losses continued, households ate into their savings and low disposable income reduced their ability to pay down debt, the Bank of Spain said.

The government may have to take additional budget measures to meet this year’s deficit goal as tax receipts are “significantly” lower than forecast and with domestic demand falling more sharply in the coming months after a temporary improvement prior to a value-added tax increase on Sept, it said. 1. For the moment, the economy has performed better due to the resilience of exports, which added 0.8 percentage points to output in the third quarter, the Bank of Spain said.

‘Total Denial’

Faurecia, Europe’s largest maker of car interiors, today cut its 2012 profit outlook, forecasting a decline in fourth-quarter European sales on a “significant” slowdown in auto production. “Despite the increased contribution of other regions and already significant cost adjustments, lower sales in Europe will affect the group’s profitability in the fourth quarter,” the company said in the statement Tuesday.

European leaders are struggling to restore investor confidence in the currency region after German Chancellor Angela Merkel sparked concern, by ruling out retroactive bank recapitalizations by the European Stability Mechanism, or ESM, rescue fund at a summit in Brussels on Oct 19.

ECB Executive Board member Joerg Asmussen said Monday a country’s aid request to the ESM doesn’t automatically trigger bond purchases by the ECB. Spanish Deputy Prime Minister Soraya Saenz de Santamaria said on Oct. 11 the country won’t apply for the aid unless it is certain that it will materialize.

Still, Spain’s economy may struggle to emerge from recession as the euro area’s economic slump deepens. French industrial confidence fell to the lowest in more than three years in October as a lack of euro-area growth weighed on exports and looming tax increases sapped consumer demand. Sentiment among factory executives fell to 85 from 90 September, national statistics office Insee said Tuesday.

‘Full Impact’

Elsewhere in the world, Sri Lanka left interest rates unchanged for a sixth month and Singapore’s inflation accelerated more than economists estimated in September, supporting the central bank’s decision to refrain from easing monetary policy this month. In Taiwan, industrial production rose 3 percent in September from a year ago, less than economists forecast.

For Spain’s economy, the worst may still be ahead, said Ricardo Santos, an economist at BNP Paribas SA in London.

“The fact that consumption fell less than in the second quarter ahead of the September tax increases suggests that the worst of the contraction is yet to come,” he wrote in an e-mailed note. “The full impact of the austerity measures should be felt later this year and into 2013.”

© Copyright 2023 Bloomberg News. All rights reserved.

Tuesday, 23 October 2012 11:27 AM
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