'No logic' to market pressure on Spain, Italy: minister

12th July 2011, Comments 0 comments

Spain's Finance Minister Elena Salgado said Tuesday there was no logic to the market turmoil swirling around Spain and Italy because both countries had strong economies.

Long-term interest rates spiked and stocks dropped heavily in Italy and Spain amid fears of contagion from the eurozone sovereign debt crisis. The euro skidded, too.

"There is no logic to Spain or Italy being affected by the market instability," Salgado told Spanish radio Cadena Ser.

"We have strong, diversified economies which have always faced up to the problems and so if we are capable of transmitting that determination to everyone, reasonably the markets have to calm down."

Spain's finance minister spoke shortly before joining talks with fellow European Union economic chiefs in Brussels to hammer out a response to the eurozone crisis.

Spanish 10-year bond yields surged Monday to the highest level since 1997, striking 6.003 percent from 5.664 percent the previous day as investors feared sovereign debt difficulties spreading in the eurozone.

Madrid's Ibex 35 index of leading shares plunged more than 2.0 percent in the first 15 minutes of trading Tuesday, after sliding 2.69 percent the previous day.

The euro plummeted to a four-month low of $1.3932 before recovering slightly to $1.3958 in Tokyo trade, still sharply down from $1.4029 in New York trade late Monday.

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.

But Spain insists it should not be lumped together with bailed-out Greece, Ireland and Portugal because it has a relatively low overall public debt and is taking tough measures to reform the economy.

Madrid has strengthened bank balance sheets, cut state spending, raised the retirement age, reformed collective bargaining and agreed to sell state assets including the national lottery.

If, finally, Spain was unable to pay its debts, the crisis would dwarf anything seen to date in the eurozone: its economy is equal in size to those of Greece, Ireland and Portugal combined.

Traders and analysts blamed the latest market panic attack on fears that some European leaders were now ready to accept that Greece default on some of its sovereign debts.

The Spanish debt risk premium -- the extra return demanded by markets compared to Germany debt -- also rose sharply after July 5 when Moody's slashed Portugal's credit rating to junk-bond status.

Now, it is also being swept along renewed concern about Italy's large public debt.

While Spain was not to blame for the latest crisis of confidence, it was vulnerable to such instability, analysts said.

They pointed to concern over high unemployment, grave doubts over the financial system's exposure to the property market and debt in Spanish semi-autonomous regions.

Edward Hugh, independent economist based in Barcelona, said a particular worry was a state-backed investment vehicle, the FROB, created to recapitalize those Spanish banks that fail to do so themselves by September.

Investors showed deep concern when the FROB only managed to raise 1.75 billion euros in a bond auction last week, falling short of a 2.0-billion-euro target.

"If the FROB itself cannot raise funding, how do you guarantee core capital?" Hugh asked.

© 2011 AFP

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