Friday, 20 April 2012

Unemployment Fuels Debt Crisis

Job-seekers wait outside a job center before opening in Madrid, Spain. Spain’s jobless rate has more than doubled since 2008 after the collapse of a real estate market that fueled a decade of economic growth. Photographer: Angel Navarrete/Bloomberg

Surging unemployment rates from Spain to Italy and Greece are threatening efforts to quell the region’s debt crisis and keeping bond yields close to record premiums relative to benchmark German bunds. 

Joblessness is soaring as European nations reduce spending, igniting strikes and protests from Athens to Madrid. Unemployment in Spain surged to almost 24 percent, pushing the euro-region level to 10.8 percent in February, the highest in more than 14 years. Italy’s rate is at 9.3 percent, the most since 2001, hampering efforts to spur economic growth.

Deepening recessions in Italy and Spain contributed to a five-week slide in Italian and Spanish bonds as the shrinking tax base helped lead to both countries raising their deficit targets. The yield premium investors demand to hold Spanish 10- year debt over German bunds reached a four-and-a-half-month high this week.

“The higher the jobless rate, the more that has to be spent on benefits, creating the potential for a negative spiral,” said Christian Schulz, an economist at Berenberg Bankin London and a former ECB official.

Berenberg Bank predicts euro-region unemployment will peak at 11.5 percent in September, he said.

The extra yield investors demand to hold Spanish 10-year bonds rather than similar-maturity German securities was 411 basis points yesterday, compared with an average 130 during the past five years. The rate has risen more than 80 basis points this year. The spread was 376 basis points for Italy and 1,072 basis points for Portugal.

Youth Joblessness

Spain’s jobless rate has more than doubled since 2008 after the collapse of a real estate market that fueled a decade of economic growth. The country is now home to more than one third of the euro-region’s jobless and more than half of young people are out of work.

Hundreds of thousands of Spaniards protested on March 29 in a general strike against Prime Minister Mariano Rajoy’s overhaul of labor market rules and the deepest budget cuts in at least three decades that are pushing the economy deeper into its second recession since 2009.

“Spain faces formidable challenges, especially concerning youth unemployment,” European Union Economic and Monetary Affairs Commissioner Olli Rehn told lawmakers at the European Parliament in Strasbourg Wednesday.

Italy’s jobless rate rose to the highest in more than a decade in February and the International Monetary Fund forecast on April 17 that unemployment will reach 9.9 percent this year. Italian bonds reversed morning gains yesterday after the government cut its growth forecasts and abandoned a goal to balance the budget next year.

Estimate Revisions

Italy’s gross domestic product will contract 1.2 percent this year, more than twice the previous forecast, and the deficit will end next year at 0.5 percent, more than the 0.1 percent previously forecast. The Italian announcement came six weeks after Rajoy abandoned Spain’s deficit goal for next year.

Joblessness in both countries may worsen as the recession deepens and rigid labor market laws are overhauled. Rajoy passed in February a plan to make it cheaper for employers to let workers go, while Italy gave companies more leeway to fire workers without fear of court-ordered reinstatements.

“High unemployment means a very dissatisfied electorate and makes it difficult to get stuff done,” said Padhraic Garvey, head of developed market debt at ING Groep NV in Amsterdam. “It makes it significantly more difficult to pass austerity measures and exacerbates a difficult situation.”

Rajoy’s Challenges

Rajoy probably will face further unrest if he’s forced to implement more budget cuts to meet ambitious deficit goals. His government has now pledged to reduce the shortfall to 5.3 percent of GDP in 2012 from 8.5 percent in 2011 and by more than 2 percentage points next year to get within the EU’s 3 percent limit. Despite a raft of austerity last year, the country achieved a deficit reduction of less than 1 percentage point.

Falling joblessness in Germany underscores the widening gap between the resilience of the euro-region’s largest economy and the so-called periphery. The nation’s adjusted jobless rate slipped in March to a two-decade low of 6.7 percent, according to the statistics office. While the 17-member euro-region economy will shrink 0.4 percent in 2012, Germany’s economy probably will grow 0.7 percent, according to economists’ forecasts compiled by Bloomberg.

“The divergence between Germany and the other economies is here to stay,” said Christoph Rieger, head of interest-rate strategy at Commerzbank AG in Frankfurt. “It provides a structural reason for spreads to stay wider, regardless of what other progress is made on containing the crisis.”

Greek Elections

In Greece, where official data showed unemployment climbed to 21 percent in January, elections scheduled for May 6 may produce a hung parliament, raising questions about the nation’s ability to implement its austerity measures. The nation’s 2 percent bond due in February 2023 trades at about 25 cents on the euro.

In Portugal, where the government forecasts the unemployment rate will average 13.4 percent this year, up from 12.7 percent in 2011, Soares da Costa SGPS SA, Portugal’s third- biggest publicly traded construction company, said it’s expanding abroad and eliminating jobs at home, where it faces a slump in government infrastructure spending. 

“High and rising unemployment is likely to impact at a political level and may make the reforms more difficult to undertake,” said Eric Wand, a fixed-income strategist at Lloyds Banking Group Plc in London. “If the political desire to reform comes in to doubt, then the market wouldn’t like that. There’s good scope for the crisis to get worse in the near term, the economies are still on pretty shaky ground and there’s a lot of political risk.”

By Daniel Tilles at

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