ECONOMIC PERSPECTIVE

IMF fears Spain’s risk premium may rise to 750 basis points

Minister insists government’s economic forecasts are “credible” despite gloomy horizon

IMF officials on Tuesday raised concerns about the chance of a renewed spike in Spain and Italy's risk premium if their governments do not trigger intervention by the European Central Bank.

"The issue here is why the yields on Italian and Spanish bonds have come down," the IMF's Chief Economist Olivier Blanchard said during a press conference held in Tokyo on Tuesday. Blanchard suggested that this may have happened because investors are anticipating that their governments would request assistance from the European rescue funds. "If this is the case, we cannot be sure that the yields will remain low," he said.

The director of the IMF's monetary and capital markets department, José Viñals, a former deputy governor of the Bank of Spain, on Tuesday presented a report suggesting Spain's risk premium could hit 750 basis points if the European authorities do not take the right decisions on time.

Spain's risk premium was up 11 basis points from Monday's close at 434 on Tuesday after the IMF revised its estimate for the contraction in the Spanish economy this year by 0.1 points to 1.3 percent, almost triple the government's figure of 0.5 percent. It also predicted Spain would miss its deficit-reduction targets for this year and the next, and forecast the average jobless rate would rise to 25.1 percent when the government expects it to fall.

Labor Minister Fátima Báñez insisted the government's economic forecasts are "credible" and that the economy could start creating jobs at the end of next year.

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