Spain risk premium not justified by economy: Salgado

6th July 2011, Comments 0 comments

A high risk premium on Spanish government debt is caused by market volatility and is not justified by the economy's performance, Finance Minister Elena Salgado said Wednesday.

"Our economic fundamentals do not justify this high risk premium so it should come down," Salgado said in an interview with AFP.

Investors demanded Wednesday an extra 2.60 percentage points in interest on Spanish 10-year bonds compared to safe-bet German debt, up sharply from 2.54 percentage points Tuesday.

Salgado said the markets were demanding higher returns before investing in the debt of other countries such as Italy, not just Spain.

"That is to say, that it is not a Spanish question. It is an instability, a volatility that is effecting the debt markets in general," the finance minister said.

Spain's risk premium has shot even higher after Moody's Investors Service on Tuesday downgraded Portugal's debt to junk status, warning Lisbon may need a new debt rescue after the first, agreed in May with the EU and IMF for 78 billion euros.

Both Spain and Italy are considered by markets to be potentially at risk owing to their strained public finances and weak growth prospects, although unlike Greece, Ireland and Portugal, they appear for the moment not to need rescue.

Despite the higher interest rates Spain has to pay to borrow on the markets, Salgado said the country had no difficulty financing itself.

Spanish bond issues had been received with "extraordinary" demand that outstripped supply four times over, she said.

Spain's government was only paying the risk premium on new debt and it had already raised a lot of money in previous years with bonds carrying long maturities, Salgado added.

"The summary of all that is that the weight of iterest of our debt on gross domestic product is still one of the lowest in Europe," she said.

The government was determined to carry on pushing through reforms and meeting its commitments to ensure that the risk premium declined, the minister said.

"But in any case, the government's opinion is that at the moment the effect is from the instability of the markets, not factors related to the Spanish economy."

© 2011 AFP

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