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 even as markets cranked the country's debt risk premium up to 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 2.64 percentage points Friday before easing somewhat, repeating the pattern seen in Greece and Ireland just before they capitulated and turned to the EU and the IMF for rescue.

A few months ago the gap was 1.70 percentage points.

Asked during an interview with Catalan radio RAC 1 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.

"I am not delivering a message of confidence just because I want to but because of concrete facts."

Spain's public debt is expected to average 62.8 percent of gross domestic product (GDP) this year, 20 percentage points below the average for the entire 27-nation European Union, the finance ministry said in a statement.

But that is up from 53.2 percent last year.

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.

"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," Zapatero said.

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.

Finance Minister Elena Salgado said Spain would issue less debt than originally planned at its remaining two bond issues this year because its budget performance has been better than expected.

""We have a commitment to investors, so we won't suspend any of the planned auctions from now to the end of the year but obviously as we have more than enough margin we will probably slightly reduce the volumes at each of those issues," she told a news conference after a cabinet meeting.

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.

© 2010 AFP

0 Comments To This Article