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Spanish public debt hits 13-year high

17 June 2011, 15:44 CET
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(MADRID) - Spanish public debt hit a 13-year high in the first quarter of 2011 and shattered a key European Union ceiling designed to ensure strong state finances, Bank of Spain figures showed Friday.

Spain's accumulated public debt amounted to 679.78 billion euros ($970 billion) or 63.6 percent of annual gross domestic product, at the end of March, the central bank said.

Up from just 55 percent of GDP a year earlier, the public debt ratio is now the worst since 1998 and above the key EU limit of 60 percent -- although many other member states have far surpassed that level.

Spain's debt is still climbing, however, as the economy recovers slowly from the 2008 collapse of a property bubble and ensuing recession which has undercut government tax income.

Unemployment hit 21.29 percent in the first quarter, the highest in the industrialised world, implying a huge cost in welfare benefits.

The government expects the public debt to rise further to 68.7 percent of GDP at the end of this year but says this remains about 20 percentage points below the EU average.

"The latest Spanish debt data isn't surprising and shouldn't of itself spook the markets but getting a grip on regional budgets -- as well as consolidating the lower property-exposed banking tier (cajas) are the two key challenges for Madrid," said Jan Randolph, London-based economist at IHS Global Insight.

"The biggest immediate risk is still contagion from Greece on their own Spanish debt auctions (one was pulled because of current poor atmospherics/sentiment re Greece)," he said in a written reply to questions.

Fears of a Greek default have forced up the cost of borrowing in financial markets for other eurozone countries, including Spain, whose public finances have come under great strain. The Greek government faces a confidence vote on Sunday as it tries to push through a key austerity package in order to secure EU-IMF funding.

"All eyes (are) on the confidence vote in Athens on Sunday. If this goes 'No,' markets will plunge on Monday," Randolph said.

Spain's central government aims to reduce the annual public deficit to 6.0 percent of GDP in 2011 from 9.24 percent of GDP in 2010.

But some autonomous regions such as Catalonia have far surpassed targets imposed by Madrid, casting doubt on the national goal.

"Today's Spanish data will only add to investor concerns that the government will not achieve its budget deficit target for 2011," said Nick Stamenkovic, macro strategist at RIA Capital Markets in London.

"The major problem is the inability of the central government to reduce the autonomy of the regional governments. As a result, fiscal worries in Spain look set to persist near-term."

The country's economic pain is taking its toll too on the banks.

Spanish banks' bad loans, a major source of concern to the financial markets, rose to the highest level in 16 years in April, a separate Bank of Spain report said.

Bank loans whose recovery is in doubt amounted to 115.35 billion euros ($165 billion), or 6.36 percent of total assets, in April -- the highest ratio since June 1995, the central bank said.

That compared to a bad loan ratio of 6.11 percent in March.

Spanish banks, hit by the collapse of the property bubble and economic doldrums, have faced a steep rise in the cost of raising money on financial markets.

The government has forced through consolidation in the sector and is requiring banks to increase the proportion of rock-solid core capital they hold to above international norms.

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