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Spain to feel crisis due to foreign debt

Published on 11/12/2007

11 December 2007

MADRID – Spain is likely to feel the impact of the current credit crisis due to its high overseas borrowing requirements, the European commissioner for economic affairs, Spaniard Joaquín Almunia, said yesterday.

Spain has the second-highest current account deficit in the industrialised world after the United States. The shortfall has quadrupled since 2000 to some EUR 80 billion last year. To cover this gap, financial institutions have to tap the international financial markets.

“From the point of view of debt, it is true the situation in the financial markets is making financial conditions more expensive,” Almunia said during a trip to Madrid. As a result, he said this would make it more costly for Spanish institutions to refinance their debt.

The tighter liquidity conditions sparked since the summer in the wake of the US subprime mortgage crisis made themselves felt again yesterday in the European interbank market.

The one-year Euribor rate, which serves as the reference for setting home-loan rates in Spain, moved back above 4.8 percent on Monday. This is likely to push up the cost of servicing monthly mortgage payments for households in Spain, some 97 percent of whom have variable interest-rate housing loans.

The European Central Bank has raised its key lending rate from historically low levels eight times since the end of 2005, to 4.0 percent. Despite the added burden on family budgets, loan delinquency rates remain at very low levels.

Almunia yesterday took pains to emphasise the solidity of the financial system in Spain. “From the point of view of the solvency of financial institutions, Spain is exemplary,” he said. “With the problems some financial institutions have had in the past few months, the names of Spanish institutions have not come up.”

Separately, Almunia cautioned political parties offering tax cuts ahead of general elections in Spain next March to take into account the need to meet growing spending requirements as a result of an ageing population.

The opposition Popular Party has pledged to eliminate personal income tax for those earnings less than EUR 16,000 a year.

The European commissioner also urged the government to push ahead with reforms to make the labour market more flexible.

[Copyright EL PAÍS, SL. 2007]

Subject: Spanish news