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Spanish debt reaches record levels

Source: Bloomberg - Fri 16th Mar 2012
Spanish debt reaches record levels

Spain's public-debt burden surged to the most in at least two decades, underlining concerns about its ability to reorder state finances as contagion from the debt crisis focuses on the euro area's 4th biggest economy.

The nation's overall debt last year amounted to 68.5 percent of gross domestic product, exceeding the government's forecast of 67.3%, data on the Bank of Spain's website showed today. That compares with 66% in Q3 and 61.2% at the end of 2010.

"Spain seems to be the main risk in the near future for Europe," Stephane Deo, chief European economist at UBS AG, wrote in a note today. "There are enormous challenges ahead, including the debt-recession spiral in Portugal and Spain."

Prime Minister Mariano Rajoy spooked investors on March 2 when he defied European colleagues by loosening his deficit target for 2012 amid the second recession in as many years. Even as the ECB's loans to banks prop up demand for Spanish bonds, the nation's borrowing costs have risen 30 basis points since Rajoy's comments.

The increase in Spanish debt was driven by the nation's 17 semi-autonomous regional governments, whose borrowings swelled 17% from a year earlier as they overshot their budget- deficit goals.

Debt Forecast

The European Commission forecasts that Spain's debt will have almost doubled to 78%of GDP by next year from where it was when Europe's sovereign debt crisis began, as the country's deficit-reduction efforts are hobbled by a relapse into recession. The IMF expects the economy to contract 1.7% this year.

Euro-area finance chiefs agreed this week that Spain's deficit goal for 2012 was unachievable after the shortfall came in at 8.5% of GDP last year, compared with a 6% target. For 2012, European finance ministers agreed to ease the goal to 5.3% from an initial 4.4%.

"So far the government has disappointed," UBS's Deo said. "An ambitious reduction of the deficit is needed."

Elsewhere today, minutes of last month's Bank of Japan meeting showed that board members are concerned that increased bond purchases by the central bank may be viewed as financing government deficit spending. They said it was important "to clearly recognize and explain to the public" that the purchases are not "for the purpose of monetization," according to the document released on the BOJ website.

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