Spain posts 0.4% economy drop amid deepening recession

PanARMENIAN.Net - Spain's recession deepened in the second quarter of the year as the economy shrank 0.4%, figures show, BBC News said.

That compares with a 0.3% contraction in gross domestic product (GDP) in the first three months of the year.

Spain's borrowing costs over 10 years hit a record high of 7.5% last week on fears that it may find it difficult to repay its international debts.

Euro group leader Jean-Claude Juncker has called for the European Central Bank to act to cut Spain's debt costs.

"We will work in close agreement with the ECB, and we will, as ECB President Mario Draghi said, see results," Mr Juncker told German and French press. "I don't want to drive expectations, but I must say, we have reached a decisive phase."

On Thursday, the ECB will announce its latest decision on interest rates and there is also increasing speculation that it may also announce that it is restarting its bond-buying programme, known as the Securities Markets Programme (SMP).

Under the SMP, the ECB buys government debt from banks on the commercial market, which helps to bring down the cost of borrowing for governments without the ECB having to lend directly to them.

The SMP was suspended at the end of January.

Mr Juncker also referred to agreements at the last European Union summit regarding the European bailout fund, the EFSF.

Under the EFSF's constitution, the fund is permitted to buy government bonds on the primary market, effectively lending directly to indebted governments such as Spain.

This is important because the European Central Bank's constitution prevents it from lending money directly to governments.

It is now hoped that co-ordinated action between the ECB and the EFSF would be more effective in bringing down the borrowing costs of countries such as Spain and Italy.

ECB president Mario Draghi is also due to meet the U.S. Treasury Secretary Timothy Geithner for talks later on Monday, July 30.