Madrid.—Spain's central bank urged euro zone leaders to act decisively over new crisis-fighting measures, warning that debt market turmoil risked choking off the country's economic recovery, which slowed in the second quarter.

With yields on Spanish 10-year bonds continuing to trade close to euro era highs at well above 6 percent yesterday amid a broad market selloff prompted by global growth fears, the bank said sovereign debt market tensions were the main risk to the country's outlook.

To help end contagion a decisive response was needed at a European and national level, it said.
Euro zone leaders agreed a second Greek bailout at an emergency summit last month and gave the bloc's rescue fund new powers to intervene. But those measures will only be operable once national parliaments have ratified them, a process that will take weeks.

Efforts by the European Central Bank on Thursday to stem the selloff disappointed investors as it bought under-pressure Irish and Portuguese bonds but not Italian or Spanish debt.

Spain's growth rate slowed in the second quarter, yesterday's central bank data showed.
GDP grew 0.2 percent quarter on quarter and 0.7 percent year on year, it in usually accurate forecasts that will be complemented by official data due on August 16. “The information available in the second quarter suggests a weakening in activity in an environment marked by a deterioration in the euro zone sovereign debt crisis,” the bank said in its monthly report.

Economists polled by Reuters had expected quarterly growth of 0.1 percent and year on year growth of 0.7 percent, down from 0.3 percent and 0.8 percent respectively in the first quarter.

Spain is under intense pressure from investors concerned it will be unable to bring down its public deficit without a sizeable recovery by an economy still being battered by weak domestic demand, suffocating austerity and chronically high unemployment.

It said containing contagion needed a “vigorous response in national economic policy” including structural reforms, as well as action from European leaders who must decisively bring into effect accords reached at their July 21 meeting.

Markets have turned their fire on Spain and Italy, but to bail out the former would test the fund's existing firepower to the limit while doing so for the latter would overwhelm it.

The Bank of Spain said that after a slip in industrial production, partly due to supply issues after the March earthquake in Japan, that a return to recovery would be seen in coming quarters.

However, with Spain's government left with little time to finish off labor and pension reforms before elections brought forward to November 20 from Spring 2012, analysts doubted the bank's optimism and its estimate for growth in the period from April to June.