Spanish economy in “huge crisis” after credit downgrade

MADRID,  (Reuters) – Spain’s sickly economy faces a “crisis of huge proportions”, a minister said today, as unemployment hit its highest level in almost two decades and Standard and Poor’s weighed in with a two-notch downgrade of the government’s debt.

Unemployment shot up to 24 percent in the first quarter, one of the worst jobless figures in the developed world. Retail sales slumped for the twenty-first consecutive month as a recession cuts into consumer spending.

“The figures are terrible for everyone and terrible for the government … Spain is in a crisis of huge proportions,” Foreign Minister Jose Manuel Garcia-Margallo said in a radio interview.

Standard and Poor’s cited risks of an increase in bad loans at Spanish banks and called on Europe to take action to encourage growth.

The downgrade spooked financial markets, forcing fellow euro zone struggler Italy to pay the highest yield since January to sell 10-year bonds as investors worried about the economic outlook in the bloc’s indebted states.

Analysts said the 5.95 billion euro Italian auction went well under the circumstances, but Rabobank strategist Richard McGuire said the 5.84 percent 10-year yield “leaves a question mark over how long Italy will be able to finance itself at levels that can be deemed sustainable”.

Italy’s main banking association said the economy may contract by 1.4 percent this year, more than the government’s 1.2 percent forecast.

Spanish bank shares dropped more than 3 percent after the downgrade before turning positive in the late morning after the Italian auction. Spain’s country risk, as measured by the spread on yields between Spanish and German benchmark government bonds, spiked before leveling off.

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