Spain in eye of strom on Greek contagion fears

5th May 2010, Comments 0 comments

Spain emerged as a litmus test for the eurozone as stocks wavered on Wednesday and financial authorities moved desperately to dispel fears that the Greek debt crisis would infect other fragile economies.

"There is no need to propose financial assistance" for Spain, the EU's Economic Affairs Commissioner Olli Rehn said in Brussels.

"No, we'll not do it," he added, when asked whether the eurozone would be forced to put together the kind of multi-billion euro loan rescue package for Spain that it is organising for debt-ridden Greece.

Spanish Prime Minister Jose Luis Rodriguez Zapatero on Tuesday also dismissed as "absolute madness" rumours that Madrid would ask for a 280-billion-euro (364-billion-dollar) bailout from the International Monetary Fund.

The IMF itself also said there was "no truth" to them.

But the denials failed to totally calm the markets.

"Bailout or not, contagion is definitely the talk of the town," said James Hughes, an analyst with CMC Markets in London.

"The contagion in Europe is a worry," said Royal Bank of Scotland strategist Gregg Gibbs.

"After getting a bigger bail-out and agreement on austerity measures with the Greek government, the market is still heading for the exit on eurozone periphery debt. The question has to be asked whether the European authorities can stop this from snowballing."

Madrid's benchmark Ibex-35 share index slumped 3.21 percent within half an hour of its opening Wednesday, although it later rebounded after the European Commission revised upwards its growth forecast for Spain for this year.

The fall extended losses from Tuesday when the index closed down 5.41 percent.

Bond yields on debt for Spain, indicating the price the government would have to pay to raise new money on financial markets, edged up slightly on Wednesday to 4.117 percent from 4.113 percent.

Spain remains the last major economy still in recession, with an unemployment rate that topped 20 percent in the first quarter, the highest in the 16-nation eurozone.

The Spanish economy has proved especially vulnerable to the global credit crunch because growth relied heavily on credit-fuelled domestic demand and a property boom boosted by easy access to loans that has collapsed.

The socialist government announced a 50-billion-euro (66.5-billion-dollar) austerity package this year as part of its drive to slash public deficit from 11.2 percent of gross domestic product in 2009 to the eurozone limit of 3.0 percent by 2013.

But many analysts argue more measures will be needed for this target to be met.

IMF chief Dominique Strauss-Kahn conceded there was a risk that "contagion" from the Greek debt crisis could engulf other weakened European economies, such as Spain.

"We must avoid contagion, and that is also what the Greek plan was tailored to do," he said in an interview with Wednesday's edition of the French newspaper Le Parisien.

He played down immediate concerns about Portugal, where the main stock market index plunged more than 4.0 percent on Tuesday.

"People talk about Portugal, but it is already taking action," he said.

Spain's Finance Minister Elena Salgado insisted the country was on the path to recovery despite the loss of confidence by investors.

"We are having a complicated time on financial markets but, in terms of the economic data, we are recovering, we have positive data and we are far better off than a year ago," she told told Cadena Ser radio.

The government has forecast a return to growth in the second half of 2010.

The Standard and Poor's agency last week lowered Spain's long-term sovereign credit rating to AA from AA+ amid fears its recession could further weaken its public finances.

But both the Moody's and Fitch agencies Tuesday denied they were reevaluating their rating for Spain, which is currently AAA, the highest possible level.

The head of the OECD, Angel Gurria, insisted Tuesday that the situation in Spain and Portugal was not comparable to Greece.

"Spain has a debt-to-GDP ratio about half that of Greece more or less, so obviously (it is) a completely different situation. Spain had four or five years of surpluses before the crisis," he told journalists in Rome on Tuesday.

At French bank BNP Paribas, analysts commented: "Both Portugal and Spain are suffering from the perception that if they get into trouble ... Germany will not be pulled round to authorising a bailout."

In a reference to the dominos which fell as the global financial crisis spread, they said: "People worry that, if Greece is Bear Stearns, Portugal is Lehman and Spain AIG.

"Somehow the EU authorities need to reduce the uncertainty about Spain and Portugal."


© 2010 AFP

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