Debt crisis: spain is in recession

The alarm signals for the euro zone from Madrid are mounting. Confidence in the markets that the government in Madrid can still turn things around continues to wane. Especially since the government itself has to admit negative developments. According to Economics Minister Luis de Guindos, the Spanish economy contracted again at the beginning of the year and is thus in a recession for the second time since 2009. "The first quarter should have been the same as the last quarter of last year," said de Guindos in an interview with the daily newspaper "El Mundo".

In the final quarter of 2011, the gross domestic product fell by 0.3 percent. If there are two consecutive negative quarters, there is talk of a recession. A few weeks ago, however, he expected an even more pronounced decline, said the minister. In order to stimulate the economy, the government wants to give medium-sized companies better access to credit.

High mistrust, high interest rates

But it is also becoming more and more expensive for the government to raise capital. Investor mistrust has increased in light of the problems in the Spanish banking sector and the weak economy. For the first time this year, interest rates on ten-year government bonds rose above the critical mark of six percent. They gained 0.13 points to 6.12 percent.

Many experts consider a level of more than six percent to be unsustainable in the long term. Greece, Ireland and Portugal had to flee into the arms of the EU and the International Monetary Fund at a level of more than seven percent because they could no longer find enough private donors.

The cost of credit default insurance for Spanish government bonds even climbed to a record high: an annual sum insured of $ 520,000 is required to protect bonds with a five-year term worth ten million dollars from loss.

Encouragement from Brussels

"We are fully back in crisis mode," said Rabobank analyst Ly Graham-Taylor. "It always looks like Spain needs some sort of rescue." The rise in interest rates was triggered by ongoing concerns about Spanish banks. They borrowed EUR 316 billion from the European Central Bank (ECB) in March – around twice as much as in February. Many financial institutions in the country are suffering from the consequences of the real estate bubble that has burst in recent years.

The ailing Euroland received psychologically important encouragement from Brussels. He has confidence in the country’s financial strength, said EU Commission President Jose Manuel Barroso. "I am absolutely convinced that Spain will be able to meet the challenges".

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