Spain Output Shrinks Fifth Quarter Amid Bailout Talk: Economy

Spain’s economy contracted for a fifth quarter, adding pressure on Premier Mariano Rajoy to seek more European aid even as the euro area’s fourth-largest economy met a bill-sales target.

Gross domestic product fell 0.4 percent in the three months through September from the previous quarter, matching the contraction of the second quarter, the Bank of Spain said in an estimate in its monthly bulletin released in Madrid today. That compares with a median forecast for a 0.7 percent contraction in a Bloomberg News survey of 10 economists.

Spain’s bonds have declined since European Union leaders last week failed to discuss further aid for the nation at a Brussels summit. Rajoy has struggled to trim a 2011 budget deficit that was more than three times the EU limit, after the country’s deepening recession pushed the jobless rate over 25 percent, sapping demand and tax revenue.

“Progress isn’t conclusive, there is a huge amount of uncertainty in Spain right now,” said Ebrahim Rhbari, a London- based economist at Citigroup Inc. “There are question marks about the banking sector and public finances and economic fundamentals suggest we will see a bailout sooner than later.”

Spain’s economy probably contracted 1.7 percent in the third quarter from a year ago, as job losses continued, households ate into their savings and low disposable income reduced their ability to pay down debt, the Bank of Spain said.

The euro weakened 0.7 percent against the dollar and was at $1.2972 as of 6:03 p.m. in Brussels. The Stoxx Europe 600 Index dropped for a third day, falling 1.7 percent.

Spanish Bonds

Spain’s 10-year bond yield rose 13 basis points to 5.6 percent after the nation sold 3.53 billion euros ($4.6 billion) of three- and six-month bills, in line with its maximum target for the auction. That compares with an intraday record of 7.75 percent on July 25, a day after Spain signed a document fixing the conditions for a 100 billion-euro EU credit line for its banks. Even with those bond gains, Spain still pays 405 basis points more than Germany to borrow for 10 years.

The bill sale took place after Moody’s Investors Service lowered the credit rating on Catalonia, the biggest contributor to GDP, along with four other Spanish regions.

Spain itself is on the verge of junk territory, as Moody’s last week decided against cutting its credit-rating below investment grade while retaining a negative outlook. The country is rated one step above junk with Standard & Poor’s and two levels higher by Fitch Ratings.

ECB Purchases

For now, Rajoy is playing down the necessity of seeking additional aid as the country’s borrowing costs have dropped since the European Central Bank offered in August to buy bonds on the secondary market of countries that request aid from the euro-area rescue fund and agree to conditions.

“Now the ECB has set up a mechanism to purchase a country’s bonds in the secondary market if it requests it, that’s an important step forward,” Rajoy said.

Rajoy said the banking union won’t be effective before 2014 because decisions made by 27 states take a long time to make.

“The mere fact we are now talking about a banking union is important,” Rajoy said. “Of course it can’t enter in force before 2014 in the same way the euro was approved in 1998-99 and entered in force in 2002 because things take time.”

Budget Deficit

Eurostat data yesterday showed Spain’s budget gap was 9.4 percent of GDP last year, the second-largest in the euro zone with Greece. Ireland had the highest budget deficit.

Spain will meet its 2012 budget deficit goal of 6.3 percent of GDP as the central government’s shortfall in the nine months through September was 3.9 percent, Budget Minister Cristobal Montoro told lawmakers today in Madrid.

The European Commission will publish its assessment of Spain’s action to correct its deficit on Nov. 7, focusing on compliance with structural deficit goals rather than its nominal target, spokesman Simon O’Connor said yesterday.

Wilbur Ross, the billionaire who has bought stakes in distressed banks in the U.S., the U.K. and Ireland, said he speaks weekly with representatives of Spain’s largest banks as he mulls an investment in the industry.

“Maybe next year will be the year for Spain,” Ross said in an interview in Abu Dhabi. “They’re just now beginning to recognize the magnitude of the problems. Until now they’ve been in total denial of the problems.”

Request for Aid

Spain’s IEE, a research institute tied to the country’s main business lobby CEOE, called yesterday on Rajoy to apply for support as soon as possible to improve companies’ and banks’ access to credit. The IEE said Spain should accept conditions for the aid and reduce spending on health care, pensions and unemployment benefits to help the economy recover.

“Markets may eventually force Spain if it appears to be playing with time to avoid seeking aid altogether,” said Jesus Castillo, an economist at Natixis in Paris. “The danger of Spain losing access to markets is less now because everyone expects it to apply sooner or later.”

European leaders are struggling to restore investor confidence in the currency region after German Chancellor Angela Merkel sparked concern by ruling out retroactive bank recapitalizations by the European Stability Mechanism, or ESM, rescue fund at a summit in Brussels on Oct 19.

Seeking Certainty

ECB Executive Board member Joerg Asmussen said yesterday a country’s aid request to the ESM doesn’t automatically trigger bond purchases by the ECB. Spanish Deputy Prime Minister Soraya Saenz de Santamaria said on Oct. 11 the country won’t apply for the aid unless it is certain that it will materialize.

Spain’s economy may struggle to emerge from recession as the euro area’s economic slump deepens. French industrial confidence fell to the lowest in more than three years in October as a lack of euro-area growth weighed on exports and looming tax increases sapped consumer demand. Sentiment among factory executives fell to 85 from 90 September, national statistics office Insee said today.

Faurecia (EO), Europe’s largest maker of car interiors, cut its 2012 profit outlook, forecasting a decline in fourth-quarter European sales on a “significant” slowdown in auto production.

Central Banks

Elsewhere, Sri Lanka left interest rates unchanged for a sixth month and Singapore’s inflation accelerated more than economists estimated in September, supporting the central bank’s decision to refrain from easing monetary policy this month. In Taiwan, industrial production rose 3 percent in September from a year ago, less than economists forecast.

In the U.S., Federal Reserve policy makers begin a two-day meeting in Washington today.

For Spain’s economy, the worst may still be ahead, said Ricardo Santos, an economist at BNP Paribas SA in London.

“The fact that consumption fell less than in the second quarter ahead of the September tax increases suggests that the worst of the contraction is yet to come,” he wrote in an e- mailed note. “The full impact of the austerity measures should be felt later this year and into 2013.”

To contact the reporter on this story: Angeline Benoit in Madrid at abenoit4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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