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Last updated: April 27, 2012 3:40 pm
Nearly one Spaniard in four is unemployed, according to data released on Friday, as the country’s economic and financial predicament prompted a government minister to talk of a “crisis of enormous proportions”.
The data from the National Statistics Institute showed 367,000 people lost their jobs in the first three months of the year. That means more than 5.6m Spaniards or 24.4 per cent of the workforce are unemployed, close to a record high set in 1994.
The data, which follow a sovereign credit rating downgrade, prompted José Manuel García-Margallo, foreign minister, to say that they were “terrible for everyone and terrible for the government”.
He compared the European Union to the doomed liner Titanic, saying that passengers would be saved only if all worked together to find a solution.
“Spain is undergoing a crisis of enormous proportions,” Mr García-Margallo told state radio, insisting that reforms by the centre-right government of Mariano Rajoy, prime minister, would eventually restore the economy to health.
Half of young people under 25 have no work and in more than 1.7m households no one has a job. That contrasts starkly with fellow eurozone country Germany, where unemployment is at its lowest point since east and west reunited in 1990.
The Spanish unemployment figures come amid a Europe-wide debate about whether government austerity imposed to cut budget deficits is threatening growth prospects. However, Luis de Guindos, economy minister, made clear that Madrid was not abandoning austerity and announced plans to raise value added tax next year, something the government had promised repeatedly not to do.
Standard & Poor’s, the credit rating agency, had delivered another blow to Spanish confidence by cutting the country’s sovereign credit rating two notches, predicting that a recession under way this year would continue into 2013. S&P lowered the country’s long and short-term rating to triple B plus/A2 from A/A-1, near the lower end of investment-grade quality.
The downgrade shook eurozone financial markets on Friday morning, helping to push up Italian borrowing costs in an auction of government bonds and slightly increasing Spanish yields in the secondary market.
“The worry is that this is unlikely to be an isolated downgrade,” said Matt King, a senior strategist at Citigroup. “Investors are discovering that Italian and Spanish government bonds are not as safe as they thought. We fear a more broad-based exit from those markets at some point.”
However, Spain’s 10-year yields have held below the symbolic 6 per cent mark since mid-April, and S&P’s downgrade failed to quell a positive day for European stock markets, which also buoyed the Spanish bourse to a 1.7 per cent gain.
As storm clouds blow towards Italy, Germany has taken the helm in a definitive test of Europe’s containment strategy
S&P’s downgrade was nevertheless worrying for Spanish leaders and foreign investors because it mentioned the need to provide extra financial support for weaker banks, a problem highlighted this week by the International Monetary Fund.
Analysts said a “bad bank” to take over problematic property loans from the balance sheets of Spanish lenders would probably have to be financed either by the Spanish state – which is already struggling to reduce its annual budget deficit and curb a rise in public sector debt in line with EU targets – or by the bloc.
Madrid is considering a common holding company to house banks’ bad assets but insisted that the banking sector would have to bear the cost and has ruled out an EU bailout.
Mr de Guindos said high VAT and other indirect taxes would help raise an extra €8bn. The move will squeeze the consumption that is keeping some businesses and jobs alive but may help Spain meet an EU-imposed target of cutting its budget deficit from 8.5 per cent of gross domestic product last year to 3 per cent in 2013.
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