"While the macroeconomic picture is steadily improving, it would take very little in the way of a deflation shock or weaker-than-expected growth to put Spain's debt ratio on a rising path"
- Timo del Carpio, an economist at RBC Capital Markets
The European Central Bank said improving sentiment toward the Euro area spurred demand for the region's debt, even as the Euro's share in global foreign-exchange reserves fell. Foreign demand for Euro area portfolio investments rose to 3.7% of GDP in 2013 from 3% a year earlier, reaching the highest level since the onset of the financial crisis. The capital inflows indicate an improving economic recovery and a rebalancing of investments away from emerging market securities. Sustained interest in the region's debt pushed the single currency 7% up against a basket of 39 currencies last year, the second largest appreciation since 1999. Policy makers have been concerned over the Euro's strength and its impact on the fragile economic recovery, and released a new package of measures designed to boost lending, growth and inflation in June.
Meanwhile, markets have become even more cautions following recent concerns over Portugal as the income and corporate tax cuts planned by Spain's Prime Minister Mariano Rajoy threat to swell the country's deficit, undermining attempts to fix the Euro zone's fourth largest budget deficit and a debt burden, which is almost 100% of GDP. Rajoy announced his tax plan on June 20, which includes a 13% reduction in tax for those, who earn less than 24,000 euros
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