Spain borrowing costs upward bound once again threatening any recovery

Spanish Prime Minister Mariano Rajoy says his country is in extreme difficulty. Nevertheless he claimed that the austerity cuts passed by the government are less painful than another bailout would be. At a meeting of his People's Party he said:“Spain is facing an economic situation of extreme difficulty, I repeat, of extreme difficulty, and anyone who doesn’t understand that is fooling themselves,”

Demand for Spanish bonds dropped. Today only 2.59 billion euros were sold ($3.4 billion). This was barely above the minimum amount planned and far below the 3.4 billion euros maximum goal.

The average yield on the bonds was 4.319 per cent up considerably from the 3.376 yield last month. Spain's 10 year borrowing costs are approaching the levels before the European Central Bank decided to make unlimited three year loans to banks last December. For a time this eased borrowing costs.

Rajoy announced back on March 2 that Spain would not comply with the deficit target that the previous government had agreed to with the European Union. Since then Spain's borrowing costs have risen even though Euro-region finance ministers agreed to a new debt target of 5.3 per cent of GDP. The EU target in 3 per cent of GDP but Spain has not managed that since 2007.

Many local administrations are cut out of capital markets and so are financed by the central government. There have been continuing protests against austerity measures including a general strike on March 29th.

The 2012 budget has been presented to Parliament. The budget includes plans to cut more than 27 billion euros from the deficit. Last year the deficit was 8.5 per cent of GDP. This year the target is now. 5.3. Ministries will see their budgets cut by 17 per cent. Such a large cut will no doubt have very detrimental effects on government services.

The unemployment rate is almost 24 per cent the highest in the European Union. The country faces interest payments of nearly 29 billion euros this year. It plans to spend about the same amount on the unemployed! For more see this article.