Spain in recession; EU girds up for talks

The national statistics institute of Spain,INE,said that the fourth biggest euro zone economy had contracted by 0.3 per cent in the first quarter of 2012.

That was the same decline seen in the last three months of 2011 and confirmed that Spain was officially in recession,defined as two straight quarters of economic contraction. The Spanish government paid higher rates to place three- and four-year bonds with wary investors while a state-controlled bank,Bankia,was reportedly hit by heavy withdrawals by clients,a dire situation seen also in Greece this week.

The nervousness about Spain’s banks comes as the euro zone financial crisis intensified. Political turmoil in Greece has increased the likelihood that it could leave the 17-country monetary union,a move that could have ripple effects throughout Europe and the world’s financial markets. Depositors have been pulling their funds out of Greek banks on worries that the country’s financial sector might collapse if Greece left the euro zone and that their savings would become worthless if the country started using a substantially devalued new currency such as the drachma.

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In Athens,a caretaker government took office to organise the country’s second elections in six weeks after an inconclusive May 6 vote jolted the euro zone.

British Prime Minister David Cameron on Thursday urged Europe to sort out its currency crisis,calling on the euro zone “to make-up or it is looking at a potential break-up,” while the IMF said that it would hold off on contacts with Greece until new elections,despite the formation of an interim government in Athens.