Officials in Madrid warned of a potential economic calamity. Though Spain has had similar bouts of high unemployment in its recent history, analysts said they foresee no quick turnaround this time, and national statistics indicated that the number of families with no one employed jumped 10 percent.
“The figures are terrible for everyone and terrible for the government,” Foreign Minister Jose Manuel Garcia-Margallo said in Madrid, according to Associated Press reports. “Spain is in a crisis of enormous magnitude.”
Spain has recently moved to the center of the financial crisis that has rocked Europe in the past two years. The deepening of Spain’s economic problems raises new doubts about whether the government can keep its deficit in check and persuade global investors to continue lending it money vital for avoiding a national default.
A bailout of Spain would stretch the capacity of the International Monetary Fund and European emergency programs, and perhaps irreparably shake confidence in the euro region’s ability to survive.
Spain’s worsening problems come as Europe faces a potential political fracture that could jeopardize efforts to contain the region’s debt crisis. Collaboration between the leaders of Germany and France has been critical to the progress the euro region has made in addressing its economic problems, but that could change if upcoming French elections put socialist challenger Francois Hollande in office.
The unemployment figures were the second piece of bad news for Spain. The Standard and Poor’s rating firm late Thursday downgraded the Spanish government’s credit standing by two levels, potentially making it more expensive for the country to borrow money on its own.
Spain needs to borrow about $800 billion over the next three years to finance budget deficits and maturing loans.
Successive downgrades and rising interest rates have previously pushed Greece, Ireland and Portugal to seek loans from the IMF. S&P warned that it saw problems ahead as the Spanish government copes with a recession and a banking sector that may need more taxpayer help.
Although Spain has minded its public debts better than many European countries, the possible need for a public bank rescue could reverse that situation quickly. In Ireland, money borrowed to rescue banks overwhelmed the government budget and forced the country into the arms of the IMF.
“We think risks are rising to fiscal performance and flexibility and to the sovereign debt burden,” S&P analysts wrote in cutting Spain’s credit rating. While crediting the government of Prime Minister Mariano Rajoy with taking steps to trim deficits and revive growth, the agency forecast at least two more years of recession and said it did not think recent reforms would generate jobs “in the near term.”
In an interview in Spain with Bloomberg News, Economy Minister Luis De Guindos said he was confident changes in economic policy would pay off, and that the government would keep its deficit-cutting plan on track.
Spain’s government has been adamant it will not need international help, and has pointed to its rising exports and recent labor market reforms as signs of strength.
The country does not need “any sort of fiscal boost or stimulus,” De Guindos said.
But the dynamic at work in Spain — and throughout much of the euro zone — is troubling.
Government austerity programs are pulling tens of billions of dollars from the economy at the same time as banks tighten credit standards to strengthen their own health. Meanwhile, households are struggling with stagnant incomes, rising unemployment and — in Spain — the collapse of a real estate bubble. Home prices are still dropping in the country and the number of bad mortgage loans is an increasing burden on local banks.