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Spain rejects contagion fears after Portugal bailout

Spain strove Thursday to distance itself from Portugal, which is seeking international aid to solve its escalating debt woes, rejecting fears of contagion from its neighbour and close economic partner.

Madrid received a solid vote of confidence from the head of the OECD, Angel Gurria, who said it is “inaccurate” and “unfair” to compare the debt problems of the two countries.

After insisting for weeks it did not need to go cap-in-hand to Brussels, Portugal threw in the towel late on Wednesday, bowing to intense market pressure and paving the way for a third bailout of a eurozone country after Ireland and Greece last year.

Outgoing Portuguese Prime Minister Jose Socrates said an EU rescue plan became inevitable when lawmakers last month rejected new austerity measures presented as the last chance to balance the country’s strained public finances.

Eurozone officials have said Portugal is likely to need around 75 billion euros ($107 billion) in European and International Monetary Fund loans over three years, and any assistance will be subject to strict conditions.

A government spokesman said Portugal will make a formal request to the European Commission later on Thursday.

The reaction on the Lisbon stock market was positive, with the main index closing up 1.18 percent as investors welcomed a move providing at least some level of certainty after months of speculation. Madrid’s Ibex-35 index edged up just 0.04 percent.

As EU finance ministers gathered in Budapest to decide how to contain the eurozone debt crisis, German Finance Minister Wolfgang Schaeuble described Lisbon’s decision as a “sensible and necessary step” given the country’s economic and financial situation.

The Fitch ratings agency said the move “will help moderate the near-term risks to macro-economic and financial stability” for Portugal.

Despite the Portuguese crisis, the European Central Bank hiked interest rates Thursday for the first time in nearly three years to tame rising prices.

The pressures on Portugal had raised doubts about other weak eurozone members including its wealthy neighbour Spain, the eurozone’s fourth largest economy.

Any such bailout would be bigger than those of Greece, Ireland and Portugal combined, possibly threatening the whole eurozone project.

But 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.

“Spain is not at risk at all after Portugal has asked for a rescue,” Finance Minister Elena Salgado told Spanish National Radio on Thursday.

She emphasized the Spanish economy is “larger, more diversified and more productive” than Portugal’s

Gurria, the head of the Organisation for Economic Cooperation and Development, said it was “completely inaccurate, totally unfair” to lump Spain with other EU states with high debt levels such as Portugal, Ireland and Greece.

“Spain will not have the same problems Portugal is facing,” he said in Budapest.

The European Commission also backed Madrid, saying the government was meeting its deficit-cutting goals despite economic challenges.

“Spain is on track to meet its objectives in terms of deficit reduction for 2010 and 2011,” said Amadeu Altafaj, commission spokesman for economic affairs.

Spain’s Socialist government is battling to bring the public deficit, which soared to 11.1 percent of gross domestic product in 2009, down to the EU limit of 3.0 percent by 2013.

Jesus Castillo, a southern Europe specialist at the Natixis bank, said “several indicators show that Spain is different” from Portugal.

He noted in particular the tough economic reforms in Spain, the political crisis in Portugal and the fact that Lisbon’s public debt was far higher than Madrid’s.

“But the medium-term outlook is that Spain remains a fragile economy, which must balance its public finances,” he said.

The Spanish economy contracted 0.1 percent in 2010 after shrinking 3.7 percent in the previous year following the collapse of a property boom that had fueled growth for more than a decade.

The crisis sent the unemployment rate soaring to 20.33 percent at the end of 2010, the highest among OECD countries.