Spain seeks to draw out deficit fixes until 2016

Spanish Prime Minister Mariano Rajoy is seeking two more years to tackle Europe’s widest budget deficit, testing his counterparts’ promise of greater policy flexibility after unemployment reached a record 27 percent.

Spain’s Cabinet on Friday approved a plan to cut the shortfall of 10.6 percent of gross domestic product back within the European Union limit of 3 percent by 2016 instead of 2014 as demanded by the European Commission, according to an e-mailed statement.

In power since December 2011, Rajoy is vying for support from his European Union peers as the International Monetary Fund’s Managing Director Christine Lagarde has warned tough austerity may endanger growth. Officials in Brussels and Berlin have indicated they’re ready to ease deficit-reduction deadlines, with the euro area in its second year of recession. Spanish output has contracted for seven straight quarters.

“There is still a lot to do to stabilize public finances and that will hurt the economy,”said Jose Antonio Herce, a partner at Madrid-based consultancy firm Analistas Financieros Internacionales. “It’s true the deficit has been reduced but we are heading toward a debt ratio of 100 percent of GDP.”

Excluding European aid to re-capitalize a banking sector burdened with bad loans linked to the real estate sector, Spain’s deficit was 7.1 percent of GDP last year, compared with 9.1 percent a year earlier, Eurostat data show.

The government will take measures to enable the economy to grow 0.5 percent next year after shrinking 1.3 percent this year, Deputy Prime Minister Soraya Saenz de Santamaria told reporters in Madrid. That compares with a September forecast of a 0.5 percent contraction this year.

The yield on Spain’s 10-year bonds was unchanged at 4.29 percent on Friday. That compares with a euro-era high of 7.75 percent in July, before the European Central Bank pledged to support the euro. Investors still demand 3.07 percentage points more than to lend to Germany for a similar maturity.

“The commitment to control public finances is compulsory but it has to take the economic situation into account,” Deputy Economy Minister Fernando Jimenez Latorre said Thursday. Rajoy’s new economic plans include measures to increase the supply of credit for smaller companies.

The government said its labor rules-overhaul implemented last year contributed to higher exports as it enabled companies to cut costs.

It increased its unemployment rate prediction to 27.1 percent for 2013 from 24.3 percent and estimated it will fall to 26.7 percent next year. In the first quarter, the rate was 27.2 percent.

“Spain faces big risks,” said Robert Wood, an economist at Berenberg Bank in London. “The capacity to react to further economic deterioration is much more limited now than it was a couple of years ago so it’s pretty important growth returns sooner rather than later.”

The European Commission, which will assess Spain’s fiscal performance and policies next month, on Thursday signaled “excessive macroeconomic imbalances” remain. “Very high unemployment and excessively tight financing conditions have exposed the vulnerabilities represented by those imbalances,” Economic and Monetary Affairs Commissioner Olli Rehn said.

Information for this article was contributed by Harumi Ichikura of Bloomberg News.

Business, Pages 27 on 04/27/2013

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