By DANIEL WOOLLS and DON MELVIN, Associated Press
BRUSSELS (AP) — Concerns about Spain's crippling financial problems flared again Friday as even news that the country had been given the final go-ahead for a bank bailout loan of up to €100 billion ($122.9 billion) failed to take the sting out of a further round of bad economic news.
Earlier Friday, finance ministers from the 17 countries that use the euro unanimously approved the terms for a bailout loan for Spain's banks, which have been struggling under the weight of toxic loans and assets from the collapse of the country's property market. Investors have been fighting shy of Spain for months, worried that the country could not keep control of its deficit during a recession while supporting its stricken financial sector.
Spain is the 17-country eurozone's fourth-biggest economy and many market-watchers fear that if it asked for a bailout, the rest of the region could not afford to foot the bill. The country and its banks were also locked in a vicious debt spiral, where the shaky banking system has been propped up by the indebted government so that the banks could buy more government debt. The loan facility agreed to on Friday was designed to break that spiral.
The bank agreement came as Spain cut its growth forecast and one of the country's heavily indebted regions asked for help. The news sent the country's borrowing costs soaring and its stock prices plummeting. In afternoon trading, Spain's main IBEX index was down almost 6 per cent while the interest rate on the country's 10-year bond — an indicator of investor confidence in a country's ability to manage its debt — was at 7.2 percent. This is a rate that many market-watchers consider is too high a price for a country to pay in the long term.
Treasury Minister Cristobal Montoro on Friday forecast Spain's recession will drag on into 2013, although the economy will not be quite as weak as it now. According to the latest figures, the country's gross domestic product is expected to contract 0.5 percent in 2013, compared with the previous forecast for it to grow by 0.2 percent.
Unemployment, which is now at 24.4 percent, will remain about the same next year, Montoro said.
Meanwhile, the economy will shrink 1.5 percent this year, a slight improvement from the 1.7 percent drop previously predicted, he added.
Also Friday, the region of Valencia that it would become the first to tap a fund designed to help out Spain's 17 semi-autonomous regions. Many Spanish regions are so heavily in debt — due to overspending and the burst real estate bubble — that they cannot raise money at affordable rates. As a result, they are struggling to repay creditors and settle contract bills.
The fund for the regions was created only last Friday and will have €18 billion ($22 billion) in capital. A third of that is a loan from the state-owned company that runs Spain's many lotteries.
The government this week passed painful austerity measures — tax hikes and cuts to benefits, salaries and pensions — to reduce state debt and strengthen confidence in its finances.
Spaniards staged massive anti-austerity protests in 80 cities and towns across the country Thursday night. Police say 15 people were arrested and 39 people injured overnight in central Madrid after tens of thousands of people took part in a demonstration.
Across Europe, markets tumbled on concerns about Spain. In France, the CAC 40 index dropped 2.14 per cent while the German DAX index was off 1.9 percent. The euro fell to a two-year low of $1.2165.
Here is a round-up of what else is happening around Europe:
Finance ministers from the 17 countries that use the euro unanimously approved the terms for a bailout loan for Spanish banks of up to €100 billion ($122.9 billion).
As part of the deal the "eurogroup" of ministers called Friday for strict monitoring of the banks that receive the aid. It also requires the Spanish government to present this month plans to reduce its budget deficit to under 3 percent of the country's €1.1 trillion ($1.34 trillion) gross domestic product by 2014.
"The eurogroup is convinced that the reforms attached to this financial agreement will contribute to ensuring a return of all parts of the Spanish banking sector to soundness and stability," the finance ministers said in a statement.