Spanish unemployment rate affects EU finances

Spain is faced with yet another crisis following the latest downgrade of their credit rating on Thursday, after it was revealed unemployment had hit 24.4%, a record high, in the first quarter of the year. One in four Spaniards is out of work while the under-25s age group saw the unemployment rate climb up to a massive 52%.

The number of unemployed people now stands at 5,639,500 leaving at least 1.7 million households with no wage earner. The recent surge in unemployment has left the policymakers fearing for the effects of a collapse in consumer spending, a drop in tax receipts and spiralling bad debts.

Amidst the downgrade from A to BBB+ and the rise in unemployment, the country is said to be back in recession with official figures due out on Monday expected to confirm the statement. 

Earlier in the week, the Bank of Spain confirmed the contraction of economy by 0.4% in the first three months of this year. Meanwhile, retail figures for March showed sales fell for a 21^st consecutive month.

Jose Manuel Garcia-Margallo, the foreign minister, said: “The figures are terrible for everyone and terrible for the government. Spain is in crisis of huge proportions.” 

After the release of new worrying figures, the government has announced reforms to the labour market, including cutting back on severance pay and restricting inflation-linked salary increases. The government has also introduced unpopular, but what they deem necessary, drastic spending cuts designed to reduce the country’s debt levels and meet deficit targets agreed with the EU.

The banking sector itself stands in a fragile situation as a bailout of 120 billion euros (£98 billion) may be required before the end of the year. 

Central bankers in Madrid said that the country’s lenders are burdened with property loans amassing around 184 billion euros (£150 billion), around 60% of property portfolios. The government is now considering whether to create a holding company for the bank’s toxic real-estate assets following failed attempts to solve the problem via forced clean-ups and consolidation of the financial sector.

Standard and Poor(S&P), responsible for downgrading Spain’s rating, said: “It is not going to be an easy job for most Spanish banks to find funding in the market. So the state may be called for at some point. But that, for now at least, is something the Spanish government seems to be willing to contemplate.”

Rajeeb Gurung