Spanish government bonds suffer as admission debt-to-GDP ratio will reach 79.8% fans fears Spain will need bailout
The admission fanned fears that the recession-bound country will lose its battle to stay on top of its debts without reaching for outside bailout funds and knocked Spanish government bond prices.
Despite announcing its most austere budget for more than 30 years last week, Spain's government admitted on Tuesday that the debt-to-GDP ratio will jump to 79.8% in 2012 from 68.5% last year.
Ministers put the rising ratio, which will still be below the European average, down to high interest payments, Spain's contribution to the Greek bailout and the cost of support for its own banks and regional authorities.
Nerves around Spain's creditworthiness – whose economy is twice the size of that of Greece, Ireland and Portugal combined – had settled somewhat since the depths of the eurozone debt crisis last year. But recent days have brought renewed fears in financial markets and among fellow eurozone members that Spain could be the biggest threat to their future.
The latest downbeat news from the government sent shares falling and bond yields climbing. Spain's main IBEX share index ended 2.7% lower while the spread between Spanish bonds and their German equivalents widened as investor confidence slipped.
The market moves undid much of the brief gains made last week in the wake of a budget from Mariano Rajoy's conservative government announcing €27bn (£22.5bn) in spending cuts and tax rises.
Economists and many Spaniards, a million of whom took to the streets in a general strike last week, fear the tough budget will accelerate the country's renewed slide into recession. The economy is already under pressure from tumbling house prices, a troubled banking system and the highest youth unemployment in the eurozone.
Economists at Citigroup predict Spain will end up being pushed into "some form of a Troika programme" this year, meaning terms set by the International Monetary Fund, the European Central Bank and the European Union. Such a move would probably be a condition of further ECB support for Spanish banks, which are currently the main buyers of newly issued Spanish sovereign debt, they say.
Still, they draw a contrast with other peripheral eurozone economies. "Even if Spain enters a programme, we expect that it would likely continue to fund itself at least partly in the market, unlike Greece, Ireland and Portugal," say Citi's Ebrahim Rahbari and Guillaume Menuet.
Nor do they see the country's sovereign debt problems reaching the same crisis levels as in Greece. "We continue to believe that sovereign debt restructuring in Spain is unlikely. But to ensure fiscal sustainability, more radical structural and in particular fiscal measures are needed, in our view. Despite a substantial increase in the provisions of Spanish banks, more capital is likely needed."
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