Spain Jobless Crisis Deepens

[SPECON]

Spaniards stood in long lines at a government employment office in Madrid on Friday, amid news of worsening unemployment.

MADRID—Spanish officials moved to shore up confidence in the ailing local economy after new data showed unemployment at an 18-year high, after credit-ratings firm Standard & Poor’s slapped Spanish government debt with a two-notch downgrade.

Spain’s statistics bureau Friday said the country’s jobless rate rose to 24.4% in the first quarter, from 22.9% in the fourth quarter of last year, inching toward its highest level on record. More than half of workers under 25 years old were without jobs. In the first quarter of 1994, Spanish unemployment reached 24.6%.

“The figures are terrible for everyone and terrible for the government,” Foreign Minister José Manuel Garcia-Margallo said in a radio interview. “Spain has been, and is, in a crisis of huge proportions.”

Spain’s labor market has been hard hit by the collapse of a decadelong housing boom and by budget cuts that are removing tens of billions of euros from the economy. In addition, rigid labor laws make it easier to dismiss workers than to adjust their wages or change their duties. Spain’s unemployment rate is more than double the 10.7% euro-zone average, and now totals about 5.6 million people.

Reacting to Spain’s worsening economic and financial outlook, S&P on Thursday downgraded Spanish government debt to triple-B-plus from single-A. S&P cited a worse-than-expected deterioration of Spain’s budget trajectory since last year, and a likelihood that the government will need to provide aid to the banking sector, which has been hit by mounting real-estate losses.

The new government of Prime Minister Mariano Rajoy has been battling to overhaul the euro zone’s fourth-largest economy since it came to power in December, pushing through draconian budget cuts, labor-market reform and a plan to clean up its struggling banks.

Though the measures are expected to give the economy a boost in the long term, many analysts believe they are weighing on output in the short term, causing a deterioration of investor sentiment and heightening concerns that the country might need an international bailout.

The S&P downgrade and bad unemployment news fanned investor fears toward Spain, sparking a selloff of government debt. Spain’s 10-year bond yield closed at 5.87%, up 0.07 percentage point from Thursday, according to data from Tradeweb. The country’s five-year credit-default swaps were 11 basis points, or hundredths of a percentage point, wider at 480 basis points, Markit data showed. Though investors initially also sold off Spanish shares, the stock market was later able to move into positive territory.

Spanish officials moved to contain the damage. At a meeting with journalists, Deputy Finance Minister Fernando Jiménez Latorre said the ratings action “just focuses on the immediate effects” of reforms, which won’t be positive. “S&P is not taking into account the full impact of the reforms we are doing,” he added.

From Germany, Finance Minister Wolfgang Schäuble offered his support for Spain by criticizing the S&P ratings move. He said it undermined efforts by the Spanish government to overhaul its finances. “The decision makes a situation that’s already critical even more critical,” Mr. Schäuble told Germany’s WDR radio.

At a separate news conference, Finance Minister Luis de Guindos cited fast-rising Spanish exports and a narrowing of the country’s historically large current-account deficit as evidence of improving Spanish competitiveness. “This shows that the Spanish economy is competitive, unlike some other European economies,” he said. “That’s the most important element of optimism for the future.”

Analysts say Spanish companies are becoming more competitive as they slash their staff levels and find more success in negotiating advantageous wage deals with unions.

Mr. de Guindos was speaking after a cabinet meeting where the government signed off the annual economic report it must submit to the European Union. The so-called Stability Program report forecasts Spanish gross domestic product will grow by 0.2% in 2013 and by 1.4% in 2014 after contracting by 1.7% in 2012 and that unemployment will fall to 24.2% in 2013.

Growth will be driven primarily by exports, with domestic demand continuing to be depressed as companies and households attempt to work off a massive load accumulated during a decade-long housing boom.

The report also forecasts that Spain’s fast-rising public-debt level will peak at 82.3% of GDP in 2013 before falling to 81.5% in 2014.

Mr. de Guindos added that the government is planning a rise in indirect taxes next year that will allow the government to raise an additional €8 billion ($10.6 billion).

Spanish officials moved to contain the damage. At a meeting with journalists, Deputy Finance Minister Fernando Jiménez Latorre said the ratings action “just focuses on the immediate effects” of reforms, which won’t be positive. “S&P is not taking into account the full impact of the reforms we are doing,” he added.

From Germany, Finance Minister Wolfgang Schäuble offered his support for Spain by criticizing the S&P ratings move. He said it undermined efforts by the Spanish government to overhaul its finances. “The decision makes a situation that’s already critical even more critical,” Mr. Schäuble told Germany’s WDR radio.

At a separate news conference, Finance Minister Luis de Guindos cited fast-rising Spanish exports and a narrowing of the country’s historically large current-account deficit as evidence of improving Spanish competitiveness. “This shows that the Spanish economy is competitive, unlike some other European economies,” he said. “That’s the most important element of optimism for the future.”

Analysts say Spanish companies are becoming more competitive as they slash their staff levels and find more success in negotiating advantageous wage deals with unions.

Mr. de Guindos was speaking after a cabinet meeting where the government signed off the annual economic report it must submit to the European Union. The so-called Stability Program report forecasts Spanish gross domestic product will grow by 0.2% in 2013 and by 1.4% in 2014 after contracting by 1.7% in 2012 and that unemployment will fall to 24.2% in 2013.

Growth will be driven primarily by exports, with domestic demand continuing to be depressed as companies and households attempt to work off a massive load accumulated during a decade-long housing boom.

The report also forecasts that Spain’s fast-rising public-debt level will peak at 82.3% of GDP in 2013 before falling to 81.5% in 2014.

Mr. de Guindos added that the government is planning a rise in indirect taxes next year that will allow the government to raise an additional €8 billion ($10.6 billion).

Via WSJ

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