Prime Minister José Luis Rodríguez Zapatero on Wednesday acknowledged the Greek debt crisis could put a drag on Spain's economic growth as the resultant credit crunch drove local banks back into the arms of the European Central bank to meet their funding needs.
Quarterly growth in the Spanish economy slowed to 0.2 percent in the period April-June from 0.4 percent in the first three months of the year as exports, which have offset a sharp fall in domestic demand, weakened.
The government's official forecast for GDP growth this year remains at 1.3 percent, although the International Monetary Fund and other organization's experts believe the figure is likely to be only half that.
"We are going through a period of financial tension and economic uncertainty, particular because of the situation in Greece, which could affect these forecasts," Zapatero said in Congress.
Zapatero said the economy is likely to grow in the third quarter at the same pace as in the previous three months.
After the release of the second-quarter GDP data, the secretary of state for the economy, José Manuel Campa, said the global slowdown would make it "more difficult" for the economy to grow 1.3 percent this year.
The latest upsurge in the euro-zone sovereign debt crisis has pushed Spanish government bond yields sharply higher making it prohibitively costly for local banks to tap the international wholesale markets to meet their liquidity needs. This was evidenced by a sharp increase in their borrowing from the ECB in August.
According to figures released Wednesday, the amount Spanish banks tapped from the ECB last month jumped by 34 percent to 69.918 billion euros, the most in 11 months. That represented 21 percent of the total 326,635 billion euros the ECB lent to the Eurosystem in August, this total constituting a fall of 8 percent from July. Spanish banks account for only about 12 percent of the Eurosystem.
"It just shows that liquidity has become more complicated at a time when banks can't issue debt," Bloomberg quoted Juan Pablo López, an analyst at Banco Espírito Santo in Madrid, as saying.
Tighter liquidity conditions for local banks in turn are likely to put a damper on the amount of credit they can grant, which stifles potential economic growth. Notably, the average amount of one-day deposits with the ECB by Spanish banks last month rose from 5.2 billion euros in July to 11.3 billion in August, the biggest amount since May of last year.
The liquidity crunch has also sparked a deposit war among Spanish lenders, which has also driven up their borrowing costs and squeezed margins.
Italian banks also drew heavily on the ECB last month, borrowing 85.1 billion euros, double the levels of a couple of months ago.
The ECB started buying Spanish and Italian government bonds in the secondary market early last month as their risk premium jumped to record euro-era highs, which in the case of Spain was over 400 basis points. The spread between the yield on the Spanish 10-year government bond and the German equivalent narrowed slightly yesterday to 351 basis points.
Fitch said Wednesday it had downgraded the credit ratings of the Spanish regions Andalusia, the Canary Islands, Catalonia, Murcia and Valencia, citing the acute deterioration in their finances, which has led to sharp increases in their levels of debt.
Fitch said that while the regions have moved to rein in spending, the weak economic recovery will limit revenues. "Fitch is of the opinion that considerable efforts will still need to be undertaken by the regions, particularly in the area of cost control." It noted the regions as a whole booked a deficit of 1.2 percent of GDP in the first half of 2011, compared with their target for the full year of 1.3 percent.
Andalusia and the Canary Islands long-term ratings were cut to A+ from AA-, Catalonia's to A- from A, Murcia's to A from AA- and those of Valencia to A- from A.
Bloomberg quoted Fitch as saying that Spain's AA+ could also be downgraded.