* Spanish Unemployment Tops 20%, Hurting Deficit Fight (Update2)

By Emma Ross-Thomas


April 30 (Bloomberg) -- Spain’s unemployment rate rose above 20 percent for the first time in more than a decade, undermining Prime Minister Jose Luis Rodriguez Zapatero’s fight to cut the euro region’s third-largest budget deficit.

The jobless rate rose to 20.1 percent in the first quarter from 18.8 percent in the previous three months, the Madrid-based National Statistics Institute said today. The rate is above a median forecast of 19.8 percent in a Bloomberg News survey of 10 economists. Spanish unemployment is the highest in the euro region and double the average rate in the European Union, according to separate data from the EU’s statistics office.

Spanish borrowing costs have surged in the past two weeks on concern the country will struggle to push the deficit below the EU limit of 3 percent of economic output. Standard & Poor’s cut Spain’s credit rating on April 28, saying the government was underestimating its fiscal problems and overestimating growth prospects. Adding to public spending, Zapatero has extended benefits for the long-term unemployed.

“The government’s scenario is a bit more optimistic than what we’re seeing, so the welfare costs for the unemployed are going to be higher,” said Jesus Castillo, an economist at Natixis in Paris. “If they don’t take new measures the 3 percent deficit target is not going to be met.”

Bond Yields

The extra yield investors demand to hold Spanish debt rather than German equivalents fell to 97 basis points today from 99 basis points yesterday. The premium reached the highest in more than a year this week.

Deputy Finance Minister Jose Manuel Campa said the unemployment rate would not affect Spain’s budget-deficit forecasts, and the government was sticking to a forecast for an average jobless rate of 19 percent this year. He said the number of unemployed, at 4.6 million in the first quarter, was not expected to reach 5 million.

The Cabinet is expected to approve measures today to reduce public-administration costs and reach a 50 billion-euro ($66 billion) spending-cut target announced in January. Finance Minister Elena Salgado will appear at a weekly news conference after today’s Cabinet meeting in Madrid.

Budget Gap

At 11.2 percent of gross domestic product, Spain’s budget shortfall was the third-biggest in the euro area last year, trailing only Greece and Ireland. S&P said it expects the Spanish deficit to stay above 5 percent in 2013, the year the government has pledged to cut it to the EU’s 3 percent limit.

EU officials are speeding up efforts to agree a bailout package for Greece as the market turmoil caused by its fiscal crisis spreads through the southern euro region. Salgado urged European colleagues to be “clearer and faster” in lending aid to Greece as the situation is “generating instability” that’s affecting Spain, according to an interview published in Cinco Dias newspaper today.

S&P expects Spain’s economy to grow an average of 0.7 percent a year through 2016, and sees the jobless rate reaching 21 percent this year. The government, which says unemployment is peaking, forecasts 1.8 percent expansion next year, accelerating to 3.1 percent in 2013.

“I suspect employment will continue falling for most of the rest of this year,” said Ben May, an economist at Capital Economics Ltd. in London. “Clearly it has knock-on implications for fiscal policy.”

Jobless Benefits

The Socialist government has extended unemployment benefits for the long-term unemployed and 80 percent of those out of work receive some kind of subsidy, Labor Ministry data shows. Zapatero has pledged to maintain welfare payments even as he works to cut the budget shortfall.

Spain has some of the highest firing costs for open-ended contracts in Europe, according to the World Bank’s Doing Business Index, while around a quarter of the country’s workers have temporary contracts. The Bank of Spain says a labor-market overhaul is “urgent” as high unemployment poses a risk to banks and the Socialist government has pledged to change labor legislation after talks with unions and employers.

“If Spain maintains for a prolonged period these millions of workers out of jobs, the banking system could become an obstacle to achieving economic recovery after being a support for the economy during the crisis,” Bank of Spain Governor Miguel Angel Fernandez Ordonez said on April 13.

Banco Santander SA Chief Executive Officer Alfredo Saenz said yesterday that changes to labor rules should be carried out immediately.

The surge in unemployment is eroding support for Zapatero, who was re-elected in 2008 on pledges of full employment. The opposition People’s Party would win 40 percent of the vote, compared with 36.2 percent for the ruling Socialists, according to a poll by the state-run Center for Sociological Research carried out in January.