Spain's unemployment rate hit a record high amid a steeping recession that may accelerate the case for the debt-laden country to seek a formal bailout from its European partners.
The country's jobless rate was reported at an all-time high of 25 percent in the three months ending in September, official figures from the Ministry of Labour and Immigration show, just one day after the country's biggest bank urged Prime Minister Mariano Rajoy to seek an international bailout for Europe's fourth-largest economy.
Santander, the nation's biggest lender and the region's largest by market value, said government-forced writedowns on bad loans have lopped more than €5bn from its bottom line so far this year. Santander's third-quarter profits fell to just €100m from around €1.8bn during the same period last year, the bank reported Thursday.
"A situation in which the Treasury funding is being helped by contingency credit lines offered by any international body will produce a fall in the sovereign debt risk premium and, as a consequence, a fall in banks' risk premium," CEO Aflredo Saenz told analysts on Thursday.
Spain's benchmark borrowing costs have fallen significantly since the first reference to the European Central Bank's programme of unlimited bond market purchases to help struggling Eurozone economies was made by President Mario Draghi in July. However the plan, known as Outright Monetary Transactionsor OMTs, has yet to purchase a single security given its precondition that its participants make a formal application with the EU and the International Monetary Fund for financial assistance.
This week, however, Spanish government bonds had their worst run since the July Draghi speech in London, rising more than 20 basis points to a three-week high of 5.7 percent in the face of Prime Minister Rajoy's reluctance to make such an application, preferring to wait for the results of various local elections and the European Commission's debt and deficit forecasts, which are due for release next month.
"I don't see any European Union leader telling me I should use the mechanism the ECB has put in place," Rajoy told reporters in Brussels at the close of this month's leaders' summit.
Friday's jobless figures, however, which show that nearly 5.8 million Spaniards are now looking for work, and more than 4 million jobs have been lost in the last five years, will add pressure to the embattled Prime Minister. A 3 percentage point rise in VAT, which kicked in last month, may slow consumer spending further after new car registrations for the month of September fell to their lowest level since 1985.
Service sector activity for the month fell to its lowest level in more than a year and the country's central bank said the economy remains mired in recession and will likely miss its own deficit reduction target of 6.3 percent of GDP. Official third quarter growth data will be published on 30 October.
The EC will publish growth and deficit estimates for the Eurozone on 7 November, and many anticipate Spain's ambitious deficits targets are unlikely to be met either this year or next. If that turns out to be the case, 2013 borrowing estimates will need to rise. UBS strategist Justin King says a 1 percent increase in next year's deficit aim will add around €10bn to its overall borrowing tally.
That is a troublesome increase, given the questions that still remain over how - and when - Spain's banks will be recapitalised by the EU's permanent bailout fund, the European Stability Mechanism (ESM).
European rules would allow the ESM to inject billions into the banks but keep the debt off of Spain's overall balance sheet. However, Germany has argued that this direct capital injection can only occur if there's a harmonised regulator for the whole of the EU's 6,000 financial institutions. EU leaders came one step closer to solving that riddle in Brussels this week, but several hurdles remain and no one seems exactly sure when the ESM injections will begin. In the meantime, Spain could be left with no choice but supply its own debt capital to stabilise its struggling banks.
Consultants Oliver Wyman and Roland Berger said Spain's banks need around €59.3bn for it to survive the expected economic downturn. Around €40bn of that is expected to come from the rescue package previously arranged with Spain's EU partners in June while the remainder will be raised in private offerings by the banks themselves.