Spain’s public debt will rise to a record this year as it sells almost 37 billion euros ($49 billion) of bonds to finance a budget deficit that was nearly three times the euro-area limit last year.
Total borrowing will reach 79.8 percent of gross domestic product as the country breaches the European Union’s deficit rules for a fifth year. That’s the highest since before the country’s return to democracy in 1978 and up from 68.5 percent last year, according to the 2012 budget that the government presented to Parliament today in Madrid.
Net debt issuance will fall from 48.2 billion euros last year as the government trims its budget deficit to 5.3 percent of GDP from 8.5 percent in 2011, according to the plan.
Lawmakers began reviewing Prime Minister Mariano Rajoy’s blueprint, which contains the deepest reductions in more than 30 years. The budget may fail to meet its goal of cutting the deficit by more than one-third as its 27 billion euros of spending cuts and tax increases will worsen Spain’s second recession since 2009, economists including Barclays Capital Antonio Garcia Pascual forecast.
“Achieving the 2012 deficit target of 5.3 percent of GDP will remain very challenging,” Garcia Pascual, chief southern European economist at Barclays, wrote in a note yesterday.
The yield on Spain’s 10-year bonds rose 6 basis point to 5.41 percent today and has gained more than 50 basis points since March 2 when Rajoy raised the deficit target, citing a deepening recession and his Socialist predecessor’s failures. Rajoy is seeking to meet the EU’s 3 percent deficit ceiling next year.
“The government will not hesitate to take measures to comply with its deficit targets,” Budget Minister Cristobal Montoro told reporters. The goal is “unconditional” and the government has the tools to make regional governments comply, Montoro said.
The budget is based on bond yields at current levels, Montoro told reporters. Budget documents forecast Spanish bond yields in 2012 will remain near the levels of February, when the yield on the country’s 10-year bond averaged 5.12 percent.
The Treasury faces redemptions of 149.3 billion euros in 2012, making for gross issuance of 186.1 billion euros, according to budget documents. The government plans to reduce the use of Treasury bills and increase the sale of longer-term debt. The shift won’t be enough to boost average maturity, which will fall to 6.2 years from 6.4 years.
The government expects interest payments on the debt of 2.71 percent of GDP on a cash basis, or 28.8 billion euros this year, according to the budget. That compares with 22 billion euros that were spent last year, said Marta Fernandez Curras, deputy minister for the budget.
The budget plan cuts spending by government ministries by 17 percent and seeks to raise revenue through ending some corporate breaks and offering a one-time amnesty on tax evasion. Those tax measures are in place since March 31, as is the 15 billion-euro package of spending cuts and tax raises approved by the one-month-old government in December and then included in the budget.
Corporate-tax revenue is forecast to rise 17.8 percent this year, while income-tax receipts will grow 4.7 percent due to increases imposed in December, according to the documents.
The economy is forecast to shrink 1.7 percent this year, following a 0.7 percent expansion last year and a contraction of 0.1 percent in 2010.
“We continue to forecast a 6.6 percent budget deficit for 2012,” Citigroup Global Markets senior economist Guillaume Menuet wrote in a note yesterday. “Implementing necessary efforts designed to lift the economy’s potential growth rate will likely have negative short-term consequences on activity.”
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