Spain distances itself from crisis-hit Portugal

Spain rushed to distance itself from Portugal’s deepening economic woes Thursday, saying markets have recognised Madrid’s stringent reforms.

Portuguese Prime Minister Jose Socrates resigned Wednesday after the opposition rejected his plan for more spending cuts and tax hikes, heightening fears Portugal will need an international rescue.

Spain, which has enacted stringent budget cuts, and labour, pension and banking reforms so as regain market confidence, is determined not to be the next eurozone domino to topple.

Asked about the risks of the crisis spreading from Portugal, Finance Minister Elena Salgado said: “The markets have shown that they recognise the efforts” made by Spain.

The government would press ahead along the same line and “keep up the pace” of reforms, Salgado said.

“We should continue to grow. I think we are doing what is necessary on this and we will continue to do the same.”

Spanish bonds barely reacted to the Portuguese crisis.

In fact, the Spanish 10-year bond risk premium — the extra return demanded by investors when compared to safer-bet German bonds — fell to 1.92 percentage points from 1.99 percentage points a week earlier and 2.83 percentage points at the height of Spain’s woes in November last year.

“A few months ago, it is true that everyone was in the same bag,” Greece, Ireland, Portugal and Spain, said French bank Natexis’ southern Europe analyst Jesus Castillo.

“Since then we have seen Spain lead important reforms of pensions and the labour market, and the thing that has been really crucial in differentiating it from Portugal and other southern European countries is the reform of the financial system,” he said.

In less than two years the country has forced the weakest savings banks to merge, reducing their number from 45 to just 14, while imposing strict new rules to bolster balance sheets.

Nevertheless there were some risks.

IESE Business School professor Javier Diaz Gimenez said Spanish banks had about 80 billion euros ($113 billion) in exposure to Portugal.

In some areas Spain was even weaker than Portugal, he added, with an unemployment rate of 20 percent, feeble growth and regional governments whose finances were not fully under Madrid’s control.

European Commission vice president Joaquin Almunia said Spain was clearly in a better position than crisis-torn countries such as Greece and Ireland, both of which have accepted international bailouts.

“Anyone who analyses the financial markets can see that the development of indicators in Spain is clearly distinct to that of other countries such as Portugal, Ireland and Greece,” he said.

Measures taken by Spain have “produced results,” Almunia said during a visit to Madrid.

“Spain is capable of beating speculative attempts,” he warned.

Spain says it managed to trim the annual public deficit to 9.24 percent of total economic output in 2010 from 11.1 percent in 2009, narrowly beating its target of 9.3 percent.

It has vowed to drive its public deficit below the European Union limit of 3.0 percent of gross domestic product by 2013.

Nevertheless, Spain’s public sector debt hit an 11-year high in the fourth quarter of 60.1 percent of gross domestic product, central bank figures showed last week.

The figure was slightly better than the government’s forecast of 62.8 percent of GDP but it was still the highest level since 1999, when it reached 62.3 percent.

In any case, Spain says people should not assume Portugal will seek financial aid after Socrates’ resignation.

“The request for help is Portugal’s responsibility and up to now it has always said that it does not intend to make the request,” Salgado said, urging people not to get ahead of the facts.

“This is an internal Portuguese matter,” she said. “We will have to wait to see what the consequences are.”