Spain falls back into recession

SPAIN has tipped back into recession, an official estimate confirms, even as the government pressed ahead with unpopular spending cuts to rein in burgeoning debt.

Spain's economy shrank by 0.3 per cent in the first quarter of 2012, equalling the slump posted in the final quarter of 2011, according to preliminary data issued by the National Statistics Institute.

The return to recession, blamed on weak domestic demand only partially compensated by exports, comes barely two years after Spain emerged from the last downturn at the start of 2010.

It was no surprise coming days after an even more pessimistic diagnosis by Bank of Spain, which predicted the economy would shrink by 0.4 per cent in the first quarter.

Today's was the first official estimate to confirm a recession - two quarters of shrinking economic output.

Despite the recession and a towering unemployment rate, which hit 24.4 per cent in the first quarter, the government has vowed to meet its ambitious deficit-cutting targets so as to regain market confidence.

Spain is "perhaps going through one of its most difficult periods on the economy", government spokeswoman Soraya Saenz said on Friday. "But if we all work together, we will get out of the crisis."

Tens of thousands of people took the streets on Sunday to protest against the conservative Popular Party's spending cuts, especially in health care and education.

Across the eurozone, meanwhile, the emphasis on austerity remedies during a recession is increasingly questioned.

Investor doubts about Spain's ability to meet its deficit goals have been amplified by the plight of Spain's banks, many bogged down in bad loans extended during a property boom which collapsed in 2008.

Markets fear the state may have to step in to help some banks' fragile balance sheets, placing its own deficit under further stress.

Standard & Poor's today downgraded the ratings of the top Spanish banks, including Santander and BBVA, after slashing the country's credit standing because of the deficit and recession.

The banks affected are Santander and its subsidiary Banesto, BBVA, Banco Sabadell, Ibercaja, Kutxabank, Banca Civica, Bankinter and the local unit of Barclays.

S&P on Friday slashed Spain's sovereign rating by two notches to BBB+ and said on Monday the same considerations "could have potentially negative implications for our view of the economic risk and industry risk affecting the Spanish banking industry".


ank of Spain figures on Friday showed commercial banks held problem real estate loans worth 184 billion euros ($234.08 billion), some 60 per cent of their property portfolio at the end of 2011.

Central bank figures show the ratio of bad loans - those at least three months in arrears - hit an 18-year high in February of 8.15 per cent of total credit extended, the highest since 1994.

Spain posted a public deficit - the shortfall in revenues to spending - equal to 8.5 per cent of gross domestic product last year, way above the 6.0 per cent target and the EU ceiling of 3.0 per cent.

As a result, the country's accumulated public debt will leap to 79.8 per cent of GDP this year from 68.5 per cent at the end of 2011, the government forecasts.

The government aims to get the deficit down to 5.3 per cent this year and 3.0 per cent in 2013. (AFP)