Zapatero 'absolutely' rules out economic rescue for Spain

26th November 2010, Comments 0 comments

Prime Minister Jose Luis Rodriguez Zapatero "absolutely" ruled out Friday an Irish-style rescue for Spain but markets remain unconvinced as borrowing costs for the country hit record highs.

The prospect of a costly rescue for Spain's economy, which is twice the size of that of Ireland, Greece and Portugal combined, is sowing deep concern in world financial markets.

Investors are demanding increasingly high rates in return for taking the risk of buying Spanish debt, adding to the problems faced by Madrid in raising fresh cash.

The gap between safe-bet German 10-year bonds and comparable Spanish bonds leapt to a record 2.60 percentage points in morning trade, repeating the pattern seen in Greece and Ireland just before they capitulated and turned to the European Union and the International Monetary Fund for rescue.

A few months ago the gap was 1.70 percentage points.

"I am not delivering a message of confidence just because I want to but because of concrete facts," Zapatero said in an interview with Catalan radio RAC 1.

The prime minister said Spain's public debt was considerably lower than the European average.

European Union figures show public debt averaged 74.7 percent of Gross Domestic Product for member states in 2009, hitting 78.1 percent in France and 73.4 percent in Germany.

But in Spain the public debt amounted only to 53.2 percent.

Asked if he could rule out a rescue in the wake of Ireland, the prime minister replied: "Absolutely."

"Those who make short term bets against Spain will be making a mistake," Zapatero said, adding that there was "no scenario" under which a rescue of Spain could be envisioned.

"We have a deficit reduction plan which is being carried out scrupulously. We are going to be one of the countries that is best at meeting its deficit plan."

The government aims to reduce the public deficit to 3.0 percent -- the eurozone limit -- in 2013 from 11.1 percent last year, the third highest in the eurozone after Greece and Ireland, through a mix of higher taxes and spending cuts.

Spain's central government deficit shrank by 47.3 percent during the first 10 months of the year to 31.26 billion euros -- but sceptics point out that the problems lie as much with the country's spendthrift regions, which enjoy a large degree of autonomy from Madrid.

Analysts warned any rescue for Spain could have vast consequences.

A former head of the German council of economic experts, Juergen Donges, told the Spanish daily El Economista that Spain's economy was nine times the size of Ireland's.

"If according to some calculations Ireland needs 80 billion (euros) then Spain would need 800 billion," Donges said.

"The European Financial Stability Fund (at 440 billion euros) does not have that much money so you would need either to give the plan more resources, which is not the solution, or tell Spain to fix things as best it can, which is not a remedy either," he added.

Spain's economy was hard hit by a massive property bubble and the global economic crisis in 2008 and 2009, and it now suffers from an unemployment rate of about 20 percent, along with zero economic growth in the third quarter.

After the Greek debt crisis, the government suspended dozens of road and rail projects and cut civil servants' wages as part of the deepest spending cuts since Spain returned to democracy following the death of dictator Francisco Franco in 1975.

Zapatero said he had no plan to call elections which are not due until early 2012.

"I was elected for a four-year mandate and I am going to complete it responsibly. It fell to me to live through a major economic crisis. I know this country needs reforms and I am going to carry them out."

© 2010 AFP

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