Spain grits teeth yet again as austerity deepens

Tuesday, December 20, 2011
By Paul Martin

Spain’s new premier Mariano Rajoy has launched a fresh blast of fiscal austerity at his inauguration, describing the national outlook as “desolate” and his task like that of a father feeding four hungry mouths with bread for two.

By Ambrose Evans-Pritchard

The conservative leader pledged to fight Spain’s unemployment curse by shaking up the labour markets. The jobless rate has hit 22.8pc with 5.4m people out of work. The tally is certain to rise further as the economy falls back into recession.

Spain’s 10-year bond yields dropped to 5.09pc, far below the 6.5pc stress peak seen last month, even though Mr Rajoy said the government will miss its budget deficit target of 6pc of GDP this year.

Global funds are gobbling up Spanish and Italian debt on bets that lenders will exploit the European Central Bank’s offer of three-year credit at 1pc to buy sovereign debt, playing the “carry trade” on the yield spread.
Mr Rajoy evoked the triumph of the mid-1990s when Spain clawed its way back to viability and astonished EU officials by meeting EMU entry terms. But the path was smoothed by a peseta devaluation of 45pc over the preceeding three years.

It may prove harder this time within the euro straight-jacket. “The global economy was much stronger then and they benefitted from devaluation,” said Dario Perkins from Lombard Street Research.

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