Bloomberg News

Spain Makes Progress in Plea for Higher Deficit From Euro Chiefs

March 12, 2012

Spain made headway in persuading euro-area leaders to let it raise its deficit target for 2012 as long as Prime Minister Mariano Rajoy maintains a pledge to bring the shortfall down to European Union limits next year.

Luxembourg Prime Minister Jean-Claude Juncker said the focus is on Spain getting the deficit down to 3 percent of gross domestic product in 2013 and not on an intermediate target for this year.

“We assume that Spain will and wants to meet its budget target for 2013,” Juncker told reporters before chairing a meeting of euro finance chiefs in Brussels today. “We’ll talk about the concrete measures that have to be taken” with a view to the 2012 budget.

Rajoy, in office since December, rattled Europe’s establishment after a March 2 leaders’ summit by unilaterally raising the 2012 deficit target to 5.8 percent of GDP from the original goal of 4.4 percent. He blamed a higher-than-planned 2011 deficit that he inherited from his Socialist predecessors.

The 2011 deficit reached 8.5 percent of GDP, overshooting the 6 percent pledged by the outgoing government of Socialist Prime Minister Jose Luis Rodriguez Zapatero. Most of the slippage was due to bigger-than-forecast regional deficits.

Rajoy has already implemented 15 billion euros of austerity measures, including higher income tax rates. The government forecasts the economy will contract 1.7 percent this year with unemployment holding above 24 percent, complicating efforts to raise revenue.

‘Absolute’ Commitment

“Spain’s commitment to budget rules is absolute and Spain is going to be the country that will show that economic reforms can lead a euro-zone economy back to growth,” Economy Minister Luis de Guindos said before the Brussels meeting.

German Finance Minister Wolfgang Schaeuble said Spain has made “great progress” in getting its public finances in order. Even the Dutch government, set for more austerity after predicting a 4.5 percent deficit next year, didn’t push Spain to maintain its original target.

The European Commission will take the lead in judging Spain’s deficit-reduction progress, Dutch Finance Minister Jan Kees de Jager said.

“We already heard last time from Spain that they won’t manage to complete 2012 as positively as had been planned,” said Austrian Finance Minister Maria Fekter. “They also missed the goal in 2011. Therefore the commission is looking at this more closely and together Spain we will have to set up a plan that at least the overhanging deficit no longer exist in 2013.”

Bond Markets

Deficit concerns have led Spanish bonds to underperform those of Italy in recent weeks. The yield on Spain’s benchmark 10-year bond rose 6 basis points today to 5.058 percent, 14 basis points more than the comparable Italian bonds. A month ago the Italian 10-year yielded 30 basis points more than Spain.

“We believe it may be unwise to ‘front-load’ the necessary fiscal adjustment in these circumstances,” Gilles Moec, co- chief European economist at Deutsche Bank AG in London, wrote in a note to investors today. “Waiting for the recovery to take hold in 2013 may ultimately be more beneficial to the underlying state of Spanish public finances.”

To contact the reporter on this story: Angeline Benoit in Brussels at abenoit4@bloomberg.net James G. Neuger in Brussels at jneuger@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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