Spain on Target for Record Debt Levels

Spain’s debt levels will jump to their highest since at least 1990 this year as the economy sinks into recession and borrowing costs rise.

The rising debt levels add to a gloomy outlook for the Spanish economy, which is suffering as the government cuts spending in an effort to improve its finances and meet a strict European Union deficit goal next year.

Spain’s debt-to-gross domestic product ratio will soar to 79.8 percent in 2012, from 68.5 percent last year, the government said in its budget presentation on Tuesday, just after data showed another rise in the number of unemployed.

The budget aims to save 27 billion euros ($35.91 billion), on top of existing cuts made by Prime Minister Mariano Rajoy’s centre-right government.

Spaniards have been fairly tolerant of his austerity but thousands turned out for a general strike last Thursday in a sign patience may be wearing thin.

“The challenge of this budget is to recover the confidence of our European partners, of European institutions, of investors in Spain,” Treasury Minister Cristobal Montoro said as he unveiled new budget details.

The government said the rising debt-to-GDP ratio was due to high borrowing costs as well as the cost of the bank rescue fund, the power tariff deficit fund, the fund to help regions pay service providers and Spain’s payment to the Greek bailout.

Investor confidence in Spain has improved since the height of the euro zone debt crisis last summer as a second rescue package for Greece was approved.

But the premium investors demand to hold Spanish over German debt has started to climb again in recent weeks, rising 3 basis points on Tuesday from Monday’s close, on fears the government will not bring the deficit under control.


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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell