Spain's economy wobbles amid bailout - San Francisco Chronicle

Brussels --

Concerns about Spain's crippling financial problems flared again Friday as even news that the country had been given the final go-ahead for a bank bailout loan of up to $122.9 billion failed to take the sting out of a further round of bad economic news.

Earlier Friday, finance ministers from the 17 countries that use the euro unanimously approved the terms for a bailout loan for Spain's banks, which have been struggling under the weight of toxic loans and assets from the collapse of the country's property market. Investors have been shying away from Spain for months, worried that the country could not keep control of its deficit during a recession while supporting its stricken financial sector.

Spain is the 17-country eurozone's fourth-biggest economy, and many market watchers fear that if it asked for a bailout, the rest of the region could not afford to foot the bill. The country and its banks were also locked in a vicious debt spiral, where the shaky banking system has been propped up by the indebted government so that the banks could buy more government debt. The loan facility agreed to on Friday was designed to break that spiral.

The bank agreement came as Spain cut its growth forecast and the heavily indebted Valencia region asked for financial help. The news sent the country's borrowing costs soaring and its stock prices plummeting. In afternoon trading, Spain's main IBEX index was down almost 6 percent, while the interest rate on the country's 10-year bond - an indicator of investor confidence in a country's ability to manage its debt - was at 7.2 percent. This is a rate that many market watchers consider too high a price for a country to pay in the long term.

Treasury Minister Cristobal Montoro on Friday forecast Spain's recession will drag on into 2013.

Unemployment, now at 24.4 percent, will remain about the same next year, Montoro said.

Meanwhile, the economy will shrink 1.5 percent this year, a slight improvement from the 1.7 percent drop previously predicted, he added.

The government this week passed painful austerity measures - tax increases and cuts to benefits, salaries and pensions - to reduce state debt and strengthen confidence in its finances.

Spaniards staged huge anti-austerity protests in 80 cities and towns across the country Thursday.