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4th Dec 2022

Spain in wait-and-see mode as recession worsens

  • Spain's PM Mariano Rajoy claims deficit-cutting measures will convince the markets (Photo: Partido Popular de Cantabria)

Spanish Prime Minister Mariano Rajoy on Tuesday (28 August) said his government has not yet taken a decision on asking for European help in refinancing its debt, pending a key meeting of the European Central Bank next week.

Speaking alongside EU council chief Herman Van Rompuy, who interrupted his vacation in Spain to meet the Prime Minister, Rajoy re-stated his commitment to "take all necessary measures" to get the country out of the worsening crisis.

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"We've already taken complicated, painful decisions, but they were required in this situation. We have to lower our public deficit, we can no longer continue in this situation where refinancing is so difficult," he said.

Fresh data published on Tuesday by the country's statistics office showed that recession is now at 1.3 percent of GDP, compared to previous estimates that suggested the economy would contract by one percent.

On the same day, the country's most economically important region, Catalonia, said it would need a €5 billion bailout from the central government to refinance its debt.

Rajoy brushed off questions about the sustainability of the country's public finances and said Catalonia was not the first region to be bailed out.

Yet the worsening data and the soaring borrowing costs for both the central and the regional governments have fuelled speculation that Spain will need a bigger bailout, on top of the €100bn earmarked for its troubled banks.

Rajoy said there were "no negotiations, because we have not submitted any request". But he also said that "it is the government's duty to serve the interests of Spanish citizens and this is the basis for all our decisions."

EU officials in Brussels do not expect any request to be made before a key ECB meeting on 6 September. ECB chief Mario Draghi earlier this month announced that the bank may purchase bonds of countries who face "unacceptably" high borrowing costs, but only if those countries first make a formal request with the eurozone bailout fund (EFSF), which is authorised to draw up a reform programme.

An internal review within the ECB is due by 6 September on the practicalities of how this linkage can be made between a central bank - supposedly strictly independent from politics and governments - and a governments' bailout fund using taxpayers' money.

For his part, Van Rompuy also stressed it is up to the Spanish government to take a decision and formulate a request.

"If the financial markets' defiance persists and if Spanish authorities think it is useful, EU institutions, including the ECB, have expressed readiness to take appropriate action," he said.

The Belgian politician said he was convinced that "if and when used," the ECB tools will be "very effective."

Germany gets its way on ECB bond-buying

The ECB has said it "may" buy Spanish and Italian bonds, but only if governments first sign reform pledges with the eurozone's bailout fund - a German demand.

Merkel surprisingly popular in Spain

Half of Spaniards approve of German leader Merkel's leadership in the euro-crisis, while blaming their own politicians for the economic gloom.

Catalan region renews call for independence

One and a half million people gathered in Barcelona on Tuesday demanding independence from Spain. It was the biggest self-rule rally ever in Catalonia.

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