Business

Spain fears deeper recession

Friday, October 05, 2012    

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MADRID, Spain — The Bank of Spain warned Thursday the nation may miss its 2012 public deficit target and slip into a deeper-than-expected recession next year as pressure grows for a sovereign bailout.

In a dramatic departure from the script of Prime Minister Mariano Rajoy's Government, Bank of Spain governor Luis Maria Linde questioned Madrid's ability to meet its deficit-cutting targets.

He cast doubt, too, on the administration's budget forecast for an economic contraction of just 0.5 per cent in 2013, an expectation that is likewise viewed with deep scepticism on the financial markets.

The central bank chief's comments coincide with rising expectations by investors that Rajoy's

right-leaning government will be forced within weeks to demand a full-blown international rescue.

"The most urgent problem facing the Spanish economy is recovering the trust of the markets," Linde told a parliamentary committee.

To do so, Spain must meet its deficit-cutting targets, clean up the banking sector, cut private and public debt, and deepen reforms to boost competitiveness, he said.

But Spain is already veering from the path to meet its promise to slash the public deficit, the governor said.

"The information now available for the state up to August indicates there are risks of slippage on the goal fixed for this year," the central bank chief said.

"Given the importance of meeting it, additional measures will have to

be considered to make it possible."

Spain missed last year's public deficit target by a wide margin, ending 2011 with a shortfall equal to 9.4 per cent of economic output instead of the promised 6.0 per cent.

This year, it has promised to lower the overall deficit to 6.3 per cent of output, but already Madrid has been forced to admit that the cost of a banking sector rescue will push the gap to 7.4 per cent.

Central and regional governments share the burden of meeting the

deficit-cutting goal.

But figures released at the end of August showed that the central government's deficit was 4.77 per cent of output, already above its target of 4.5 per cent for the whole year.

Linde criticised, too,

the central government's economic predictions for 2013 on which the budget is based.

"The forecast for a decline of 0.5 per cent of gross domestic product in 2013 is certainly optimistic in comparison with the forecasts of most international organisations and analysts, which are centred on a fall of about 1.5 per cent," he said.

That would be enough to place at risk the 2013

target of reducing the public deficit to 4.5 per cent of economic output.

"If in fact the decline in activity in 2013 is closer to 1.5 per cent than 0.5 per cent, the foreseeable impact on the deficit could be estimated at 0.3 percentage points of GDP," Linde said.

"That slippage is important, but could be corrected in the course of the year," he added.

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