[h=3]By STEPHEN FIDLER And JONATHAN HOUSE[/h]Spanish Prime Minister Mariano Rajoy's government has a new chance to shore up investor confidence in the economy when it announces its 2013 budget plan on Thursday, together with other changes aimed at improving the way the economy functions.
On Wednesday, Spain's borrowing costs rose and its stock market fell sharply on the eve of Madrid's announcement, putting the shaky economy again at the center of Europe's race to preserve its currency union.
Analysts said investors will be watching the announcements as an indication of whether Spain is laying the groundwork for a bailout request. Mr. Rajoy's government has committed itself to reduce a budget deficit of nearly 9% of gross domestic product in 2011 to 6.3% in 2012 and to 4.5% in 2013.
On Friday, the government will provide a final estimate on the capital needs of the country's ailing banks, as required under terms of the credit of up to €100 billion ($129 billion) granted by the euro zone to the government earlier this year.
Spanish officials have said the final number will be slightly below a €62 billion initial estimate, and that the banks could end up needing even less than that because some will be able to raise the funds on their own. A planned state-run "bad bank" that will hold questionable loans will further reduce capital needs.
Such a result could cheer investors, said Ben May, analyst at Capital Economics. "Not only would this be good news for the Spanish public finances, it would also leave the [euro-zone] bailout facilities with more firepower to tackle the region's other problems," he said.
On Wednesday, Spain's benchmark IBEX-35 index fell 3.9% and other European exchanges posted losses as well. The government's 10-year borrowing costs rose nearly one-third of a percentage point, to above 6%, placing renewed pressure on Madrid to find a way out of its debt crisis and appearing to crimp its prospects for avoiding a bailout from its euro-zone partners.
The euro fell to a two-week low against the dollar. Interest rates for Italy, whose government is also burdened by high borrowing costs, rose as well.
Markets were calmer Thursday morning. Italy's FTSE Mib was up 0.5% and Spain's benchmark IBEX-35 index was 0.3% higher. The yield on Spanish 10-year bonds was down 0.04 percentage point at 5.98%, and Italy's corresponding yield was up 0.01 percentage point at 5.20%.
Antiausterity demonstrations continued for a second day in Madrid on Wednesday, after protests turned violent in front of the Spanish Parliament on Tuesday. In Athens, too, tens of thousands of demonstrators took to the streets against anticipated budget cuts.
Wednesday's market moves marked a sharp correction to the boost delivered by European Central Bank chief Mario Draghi's promise on Sept. 6 to buy bonds of euro-zone governments that request bailouts and submit to economic-reform programs. Like previous relief rallies that came after European leaders announced new crisis-fighting measures, the so-called Draghi Effect has continued to dissipate.
The ECB's early September announcement lifted the sense of impending crisis in the euro zone, and Spain's borrowing costs fell. That raised concerns among officials and analysts over whether its move was lifting pressure on debtor countries like Spain to take action and on creditors such as Germany to make concessions that are necessary to heal the failings in the currency union.
Comments by Mr. Rajoy on Tuesday fanned concerns that Madrid would procrastinate in requesting a rescue package from the euro-zone bailout fund, analysts said. In an interview with The Wall Street Journal, Mr. Rajoy said Madrid would surely ask for help if Spain's borrowing costs remain "too high for too long."
Some predicted that the spreads between Spanish bonds and lower-risk German bonds would continue to widen if Madrid fails to move. "As long as the government refrains from asking, we will see Spanish spreads widen. The market will push Spain into asking for a bailout," said Alessandro Giansanti, a senior interest-rate strategist at ING.
Wednesday's general pessimism was compounded by a report from the Spanish central bank, which said the recession-bound economy continued to contract at a significant rate in the third quarter.
—Tommy Stubbington contributed to this article.Write to Stephen Fidler at [email protected] and Jonathan House at [email protected]
On Wednesday, Spain's borrowing costs rose and its stock market fell sharply on the eve of Madrid's announcement, putting the shaky economy again at the center of Europe's race to preserve its currency union.
Analysts said investors will be watching the announcements as an indication of whether Spain is laying the groundwork for a bailout request. Mr. Rajoy's government has committed itself to reduce a budget deficit of nearly 9% of gross domestic product in 2011 to 6.3% in 2012 and to 4.5% in 2013.
On Friday, the government will provide a final estimate on the capital needs of the country's ailing banks, as required under terms of the credit of up to €100 billion ($129 billion) granted by the euro zone to the government earlier this year.
Spanish officials have said the final number will be slightly below a €62 billion initial estimate, and that the banks could end up needing even less than that because some will be able to raise the funds on their own. A planned state-run "bad bank" that will hold questionable loans will further reduce capital needs.
Such a result could cheer investors, said Ben May, analyst at Capital Economics. "Not only would this be good news for the Spanish public finances, it would also leave the [euro-zone] bailout facilities with more firepower to tackle the region's other problems," he said.
On Wednesday, Spain's benchmark IBEX-35 index fell 3.9% and other European exchanges posted losses as well. The government's 10-year borrowing costs rose nearly one-third of a percentage point, to above 6%, placing renewed pressure on Madrid to find a way out of its debt crisis and appearing to crimp its prospects for avoiding a bailout from its euro-zone partners.
The euro fell to a two-week low against the dollar. Interest rates for Italy, whose government is also burdened by high borrowing costs, rose as well.
Markets were calmer Thursday morning. Italy's FTSE Mib was up 0.5% and Spain's benchmark IBEX-35 index was 0.3% higher. The yield on Spanish 10-year bonds was down 0.04 percentage point at 5.98%, and Italy's corresponding yield was up 0.01 percentage point at 5.20%.
Antiausterity demonstrations continued for a second day in Madrid on Wednesday, after protests turned violent in front of the Spanish Parliament on Tuesday. In Athens, too, tens of thousands of demonstrators took to the streets against anticipated budget cuts.
Wednesday's market moves marked a sharp correction to the boost delivered by European Central Bank chief Mario Draghi's promise on Sept. 6 to buy bonds of euro-zone governments that request bailouts and submit to economic-reform programs. Like previous relief rallies that came after European leaders announced new crisis-fighting measures, the so-called Draghi Effect has continued to dissipate.
The ECB's early September announcement lifted the sense of impending crisis in the euro zone, and Spain's borrowing costs fell. That raised concerns among officials and analysts over whether its move was lifting pressure on debtor countries like Spain to take action and on creditors such as Germany to make concessions that are necessary to heal the failings in the currency union.
Comments by Mr. Rajoy on Tuesday fanned concerns that Madrid would procrastinate in requesting a rescue package from the euro-zone bailout fund, analysts said. In an interview with The Wall Street Journal, Mr. Rajoy said Madrid would surely ask for help if Spain's borrowing costs remain "too high for too long."
Some predicted that the spreads between Spanish bonds and lower-risk German bonds would continue to widen if Madrid fails to move. "As long as the government refrains from asking, we will see Spanish spreads widen. The market will push Spain into asking for a bailout," said Alessandro Giansanti, a senior interest-rate strategist at ING.
Wednesday's general pessimism was compounded by a report from the Spanish central bank, which said the recession-bound economy continued to contract at a significant rate in the third quarter.
—Tommy Stubbington contributed to this article.Write to Stephen Fidler at [email protected] and Jonathan House at [email protected]