Spain says risk premium on debt unjustifiable

6th July 2011, Comments 0 comments

Spain is being forced to pay an unjustifiably high risk premium but can nevertheless finance its debt comfortably, Finance Minister Elena Salgado said Wednesday.

Salgado, speaking to AFP a day after Moody's slashed Portugal's credit rating to junk status, blamed the Spanish risk premium on volatility in the debt markets and stressed the wide differences between the Spanish and Portuguese economies.

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

Investors were demanding 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.

But Salgado said the markets also were demanding higher rates to lend to 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.

Despite the higher interest rates Spain had 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 interest 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.

Madrid has enacted measures to strengthen bank balance sheets, cut state spending, raise the retirement age, ease hiring and firing, sell off state assets and reform collective bargaining, all aimed at stabilising the public finances.

"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."

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 are not having to be bailed out.

Spain's economic crisis, triggered by the 2008 property bubble collapse and the international financial crisis, sent the unemployment rate soaring to 21.29 percent in the first quarter of 2011.

Salgado also expressed surprise at some of Moody's arguments for the Portugal downgrade, notably its view that Lisbon may have trouble raising money at sustainable rates before the second half of 2013.

"When you say now as one of the arguments that Portugal will have difficulties going to the market in the second half of 2013 that seems to us premature."

But in any case she said Spain's economic situation could not be compared to Portugal's, although she wished Lisbon well.

Portugal's deficit reduction figures for the first quarter were slightly worse than expected, unlike Spain's, Salgado said.

"Spain is complying with its commitments, it is not in an adjustment programme and our economy is a much more diversified economy, more robust, stronger," she said.

"Spain's situation has nothing to do with the situation in Portugal. They are two different economies and have been for many years."

© 2011 AFP

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