Spain’s borrowing costs hit record high

The Spanish government’s cost of
borrowing has hit a new record amid renewed concerns over the state of its
economy and public finances.

The interest rate Spain is being
asked to pay by investors is now 2.23 percentage points higher than that being
demanded of Germany.

This widening gap in the bond
market marks a drop in confidence in Spain’s ability to repay its debts.

The Spanish cabinet has also
approved unpopular changes to labour rules.

“It is a necessary labour
reform,” said Deputy Prime Minister Maria Teresa de la Vega. “One of
the most important reforms of the last 20 years.”

The changes, which include a cut in
the level of severance pay, have prompted a call for a general strike in
September.

Spain, which is emerging from a
two-year long recession, is now pursuing austerity measures. These include a 5
per cent cut to public sector pay in an effort to bring down its borrowing and
help restore its credibility among international lenders.

Its budget deficit is currently
running at over 11 per cent of GDP – way above the 3 per cent limit imposed by
the EU.

This week the Spanish government
has also been forced to deny newspaper reports that it is in talks with the IMF
over a Greek-style bail-out package to help it manage its debts.

The Spanish Prime Minister Jose
Luis Rodriguez Zapatero is scheduled to meet IMF chief Dominique Strauss-Kahn
on Friday, but Spanish officials say the talks are unconnected to the press
speculation.

Investors remain concerned about
the underlying strength of Spain’s economy.

There are also worries that
spending will hamper its recovery from recession, with its unemployment rate of
20 per cent – the highest in the eurozone – a significant concern.