Spain joblessness hits new high, fuelling austerity debate

Unemployment in Spain jumped to a record 27.2 percent, data showed on Thursday, fuelling a European debate over whether to ditch austerity policies and switch to reviving economic growth.

More than 6 million Spaniards were out of work in the first three months of this year, raising the rate in the euro zone's fourth biggest economy to a level unseen since records began in the 1970s.

Joblessness has grown for seven quarters in a row, leaving more Spaniards without work than the entire population of Denmark, and the percentage rate now matches that of Greece, which is in the grips of a full-blown depression.

Spain has slipped in an out of recession for the past five years. In the first quarter more businesses and individuals went into bankruptcy and default, further driving up bad loan rates in Spain's troubled banking system and hitting profits at three of the country's top five lenders, Santander, Caixabank and Sabadell.

The grim economic picture contrasts sharply with financial markets. There, waves of liquidity from around the globe have brought down Spain's borrowing costs and all but banished last year's fears that a budget crisis would force Madrid to seek a international sovereign bailout.

"These figures are worse than expected and highlight the serious situation of the Spanish economy as well as the shocking decoupling between the real and the financial economy," strategist at Citi in Madrid Jose Luis Martinez said.

On the markets, yields on Spain's 10-year bond  fell this week to their lowest level since late 2010. Prime Minister Mariano Rajoy imposed drastic spending cuts and tax increases last year, trying to bring a huge budget deficit under control, in line with the euro zone's policy of fighting its debt crisis with austerity. However, the belt-tightening has aggravated the Spanish economy's problems.

With the entire euro zone heading into a second year of recession, top EU economics official Olli Rehn and his boss European Commission President Jose Manuel Barroso have begun to push for more flexibility on public deficits.

Others, including European Central Bank policymakers, disagree, saying easing up on austerity would not mean economic recovery. Nevertheless, senior sources said the ECB is closer to lowering interest rates than at any time since it last cut them in July 2012, and is likely to shave a quarter percentage point off its main rate next week.

Spain's weak economy is hurting even the likes of Santander, the euro zone's biggest bank. Santander reported a 26 percent drop in its net profit on the quarter, citing the prolonged recession, low interest rates and the need to set aside more capital to cover rising bad loans.

Rajoy has tried for months to tread a line between the pro-austerity and pro-growth camps, saying Spain would always be disciplined on spending but indicating that his next round of measures, to be announced on Friday, would lean more to stimulating small business growth than short-term cost cuts.

Given this tight-rope act, few economists believe Rajoy's new measures will be ambitious enough to restart the ailing economy and create jobs.

Embittered public

Rajoy's budget cuts, along with corruption scandals, have embittered the public and protests have become commonplace. Police arrested four people in Madrid before dawn on Thursday on accusations of trying to set fire to a bank. Demonstrators plan to march on parliament at 1500 GMT to protest against Rajoy's economic policy and the cost of a 41.5 billion euro bailout of Spanish banks that will fall on taxpayers.

Most banks reported that non-performing loans rose in the quarter as unemployed Spaniards continue to default on their mortgages and other credit, and companies go under.

Sabadell, Spain's fifth biggest bank, said the financial situation was highly unstable and complex due to a weak economy, low interest rates and financial sector reform.

In another sign of growing concerns about the economy, banking and official sources said the Bank of Spain was preparing new rules that could force lenders to recognise bad corporate debts that have until now been classified as sound.

Most Spanish companies are currently cut off from regular loan financing, a situation that has fuelled a sharp increase in bankruptcies in the first quarter of the year.

Hundreds of other firms are shutting down or leaving Spain, such as French electronics retailer Darty, while the country's biggest employers are making mass layoffs. Airline Iberia , international telecoms group Vodafone and Madrid's public television station Telemadrid all announced plans to cut thousands of jobs in the first part of this year.

Youth unemployment has soared to 57 percent and Spain's population fell last year for the first time on record as young people and immigrants who came to Spain to work in the once booming construction industry, flee the  crisis.

Analysts say the most troubling statistic is that almost a third of jobless have been out of work for more than two years. Also, two million Spanish households have no one earning a wage. "More than half Spain's unemployed have very low levels of education and skill levels and that, combined with several years of unemployment, is the biggest risk to recovery in Spain," said Marcel Jansen at Madrid-based think tank Fedea.

"How on earth are we going to reemploy more than 3 million low educated people? This is a big question mark."