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Bank of Spain urges euro crisis action, warns on debt

Source: Reuters - Fri 5th Aug 2011

Spain's central bank urged euro zone leaders to act decisively over new crisis-fighting measures, warning that debt market turmoil risked choking off the country's economic recovery, which slowed in the second quarter.

With yields on Spanish 10-year bonds continuing to trade close to euro era highs at well above 6% on Friday amid a broad market selloff prompted by global growth fears, the bank said sovereign debt market tensions were the main risk to the country's outlook.

To help end contagion a decisive response was needed at a European and national level, it said.

Euro zone leaders agreed a second Greek bailout at an emergency summit last month and gave the bloc's rescue fund new powers to intervene. But those measures will only be operable once national parliaments have ratified them, a process that will take weeks.

Efforts by the European Central Bank on Thursday to stem the selloff disappointed investors as it bought under-pressure Irish and Portuguese bonds but not Italian or Spanish debt.

Spain's growth rate slowed in the second quarter, Friday's central bank data showed.

GDP grew 0.2% quarter on quarter and 0.7% year on year, it in usually accurate forecasts that will be complemented by official data due on Aug. 16.

"The information available in the second quarter suggests a weakening in activity in an environment marked by a deterioration in the euro zone sovereign debt crisis," the bank said in its monthly report.

Economists polled by Reuters had expected quarterly growth of 0.1% and year on year growth of 0.7%, down from 0.3% and 0.8% respectively in the first quarter.


Spain is under intense pressure from investors concerned it will be unable to bring down its public deficit without a sizeable recovery by an economy still being battered by weak domestic demand, suffocating austerity and chronically high unemployment.

It said containing contagion needed a "vigorous response in national economic policy" including structural reforms, as well as action from European leaders who must decisively bring into effect accords reached at their July 21 meeting.

Euro zone leaders last month agreed a second bailout package for Greece as well as easier lending terms for Ireland and Portugal and broader powers for the bloc's rescue fund.

Markets have turned their fire on Spain and Italy, but to bail out the former would test the fund's existing firepower to the limit while doing so for the latter would overwhelm it.

Italy said on Friday its economy grew 0.3% quarter on quarter in the April to June period after quarterly growth of 0.1% in the first quarter of the year.

The premium investors demand to hold Italian over German debt passed the premium for Spanish debt on Friday for the first time since the euro's launch.


The central bank said that a strong push from tourism was a key factor behind growth in the second quarter, cancelling out a slump in private consumption and manufacturing.

The Bank of Spain said that after a slip in industrial production, partly due to supply issues after the March earthquake in Japan, that a return to recovery would be seen in coming quarters.

However, with Spain's government left with little time to finish off labour and pension reforms before elections brought forward to Nov. 20 from Spring 2012, analysts doubted the bank's optimism and its estimate for growth in the period from April to June.

"I'm a little surprised as it's not consistent with economic indicators throughout the second quarter which pointed to subdued growth. We would still expect economic growth to slow down further in coming quarters," said Giada Giani, economist at Citi.

The government forecasts 1.3% growth in gross domestic product this year, but most economists polled by Reuters said growth of 0.7% year on year was more likely.

Spain's target of cutting its public deficit to 6.0% this year from 9.2% in 2010 could be hard to meet if growth targets are not realised.

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