Jitters over peripheral peril drive up Spain's risk premium

Spain's risk premium hit a high for the year of 285 basis points after ratings agency Moody's warned it could downgrade several Italian banks.

The reward demanded by investors to hold Spanish sovereign debt instead of Germany's (considered the safety benchmark) came near the historical high of 300 basis points reached after Ireland's bailout announcement, underscoring the contagion effect of disturbing financial news among the euro-zone's so-called peripheral nations.

A lack of clear results out of the EU summit to restructure Greek debt did the rest. In line with stock markets across Europe, the blue-chip Ibex 35 lost 1.31 percent to close at 9,812.70 points, its lowest level since January 11.

Spanish Prime Minister José Luis Rodríguez Zapatero, speaking in Brussels Friday, lamented "the scant support from the [main opposition] Popular Party" for his administration's economic reforms, which include unpopular spending cuts to bring the deficit in line with EU guidelines by 2013. Zapatero said he will complete his reforms "whatever it takes."

"We are working in the midst of excessive market mistrust and very little commitment from the opposition, but that's the way things are," said the Spanish leader.

Zapatero's PP remarks followed a question about Greece and the political unity that is being encouraged there to get austerity plans approved by parliament.

"The more serious the economic situation, the more necessary responsibility between parties becomes," Zapatero declared.

Zapatero added that Spain's financial sector is "well-disposed" towards a rollover of Greek debt by private investors. In any case, Spanish lenders' exposure to it is "very low, less than one percent, and will not cause any trouble."

Meanwhile, PP leaders rejected being compared with the uncooperative Greek opposition. "Spain is not Greece," said the conservative party's economy coordinator, Cristóbal Montoro, because "it is neither being intervened nor financed." According to Montoro, what the PP is saying is that "Spain is not implementing the real reforms" the country needs, but purely "cosmetic" ones that do not create new jobs.

As part of its ongoing austerity drive, the government said it will reduce the ceiling on non-financial state spending for 2012 by 3.8 percent, down to 117.3 billion euros. These plans assume that state income will rise by 10 percent.

Spain's spending cut program aims to bring down the deficit from 9.2 percent of GDP in 2010 to six percent by 2011, 4.4 percent in 2012 and three percent in 2013.