Spanish recession darkens as country mulls bailout

Tue Aug 28, 2012 2:34pm EDT
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By Nigel Davies

MADRID (Reuters) - The Spanish economy is falling deeper into recession and depositors are pulling their money out of the banks, figures published on Tuesday showed, while the country's most economically important region, Catalonia, said it needed a major rescue from Madrid.

Spain's recession grew stronger in the second quarter of the year and is expected to get worse as austerity measures introduced in response to the euro zone debt crisis cut into demand for goods and services.

A rush by consumers and firms to withdraw their money from Spanish banks intensified in July, with private sector deposits falling almost 5 percent, to 1.509 trillion euros ($1.896 trillion) at end-July from 1.583 trillion a month earlier.

Analysts believe it is inevitable that Spain will soon have to call for a European rescue package to help bring its debt costs down as austerity measures designed to slash the public deficit push the economy deeper into recession.

Adding to Spain's bleak outlook, the north-eastern region of Catalonia, which represents around a fifth of the country's economy, said it needed a 5 billion euro rescue from the central government to meet its financing needs and debt costs this year.

Against this background European Council President Herman Van Rompuy said it was up to Spain to decide whether to apply for additional aid, after meeting with Prime Minister Mariano Rajoy in Madrid. Rajoy repeated that he needed more details from the European Central Bank to help him decide.

Their meeting came a week before the ECB discusses new measures to help debt costs in the European nations hardest-hit by the crisis. The ECB meeting on September 6 also coincides with a visit by German Chancellor Angela Merkel to the Spanish capital and a key longer-term bond auction.

"With much more fiscal austerity in the pipeline and unemployment at astronomic highs, the risks are clearly tilted towards a more protracted recession," said Martin van Vliet, an economist at ING.   Continued...

A man walks past posters that read, "No to cuts," after a civil servants' protest against government austerity measures in front of the Treasury and Public Administration Ministry in Madrid August 10, 2012. REUTERS/Susana Vera