Spain's economy shrinks further

The Bank of Spain warned Wednesday that the country is in a deep recession, a day after clashes in Madrid between protesters and the police led to 38 people arrested and 64 injured.

The demonstrations on Tuesday evening against the government's austerity drive at a time of mass unemployment put in sharp relief the scale of discontent that's brewing in a country suffering its second recession in three years and an unemployment rate of nearly 25 per cent.

In the wake of the clashes and a warning from the central bank's that the country's economy continues to shrink "significantly," financial markets have grown increasingly nervous.

The main IBEX index in Madrid was down a hefty 2.6 per cent, while Spain's 10-year bond yield edged back up toward six per cent.

On Tuesday, several thousand people — 6,000 according to authorities — converged on the national parliament building in central Madrid.

More than 1,000 riot police blocked off access to the building, forcing protesters to crowd nearby avenues.

Police baton-charged protesters at the front of the march and some demonstrators broke down barricades and threw rocks and bottles.

Smaller demonstrations Tuesday attracted hundreds of protesters in Barcelona and Seville.

The protesters are calling for fresh elections, claiming the government's hard-hitting austerity measures are proof the ruling Popular Party misled voters when it won power last November.

Leaders of the protests said on their website that they would stage a fresh rally beginning at 9 p.m. ET Wednesday.

A National Police spokeswoman said Wednesday that 27 of the injured were police officers. She spoke on condition of anonymity because of police rules.

The government praised the police, saying the protest was an attack on democracy. "I congratulate the police," said Interior Minister Jorge Fernandez Diaz.

"They did their duty." Opposition Socialist party spokesman Eduardo Madina said the government should take note of the popular discontent, adding that some images of the police charges displayed "pure brutality."

The government is expected to present a new batch of economically painful reforms on Thursday when it unveils a draft budget for 2013.

Even before enacting the new measures, the government was predicting a 1.5 per cent economic contraction this year. The Bank of Spain's warning Wednesday suggests it may be more.

On Friday, an auditor will release the results of stress tests on Spanish banks hit hard by the collapse of the country's real estate sector, which drove economic growth until the 2008 financial crisis hit.

The government will then judge how much of a €100 billion ($126 billion Cdn) loan it will tap to help bail out the banks. Initial estimates say the banks will need some €60 billion ($75.8 billion Cdn).

But Spain is also under pressure from investors to apply for European Central Bank assistance in order to keep its borrowing costs down.

Spanish Prime Minister Mariano Rajoy has yet to say whether Madrid will apply for the aid, knowing that such assistance comes with conditions.