Montoro Says Spain to Discuss Pace of Budget Cuts With EU

Spain’s government plans to negotiate the pace of its budget cuts to ensure the economic slump doesn’t deepen after Prime Minister Mariano Rajoy said the nation made “unprecedented” efforts in 2012.

“We need to continue cutting the public deficit at a rhythm that doesn’t worsen the recession,” Budget Minister Cristobal Montoro told a Madrid news conference today. “The rhythm is what we need to negotiate with the European Commission and the International Monetary Fund.”

Rajoy said earlier today that the government significantly reduced the budget gap last year, without providing a figure for the shortfall. Budget data to be released in the coming weeks will show how close his five rounds of spending cuts and tax increases got the shortfall to a 2012 target of 6.3 percent of output set by euro-area finance ministers in July.

“The question is how low the deficit will fall compared to the market’s estimates,” said Peter Schaffrik, head of European rates strategy at RBC Capital Markets in London. “Spanish public finances can be made sustainable, but the deficit needs to come down further as well as overall borrowing costs.”

Economists expect a Spanish budget gap of 8 percent in 2012, in line with the commission’s forecast, including European aid to recapitalize the banking industry accounting for one percentage point. The deficit was the second largest in the region along with Greece’s in 2011, with both nations at 9.4 percent. Ireland had the biggest shortfall in 2011.

Deficit Targets

Spain’s deficit goals are 4.5 percent of gross domestic product for this year and 2.8 percent for 2014. The Bank of Spain predicts the nation will miss its targets unless it steps up the deepest budget cuts in its democratic history. On the brink of a junk credit rating, Spain escaped a sovereign bailout last year after the European Central Bank’s promise to safeguard the euro lowered borrowing costs.

Spanish 10-year bond yields fell 13 basis points to 5.30 percent at 12:19 p.m. in Madrid after the Treasury sold 5.57 billion euros ($7.5 billion) of six- and 12-month securities, meeting its maximum target for the sale even as one-year borrowing costs rose.

That compares with a euro-era high of 7.75 percent in July before the ECB pledge. Rajoy will meet ECB President Mario Draghi at 4 p.m. at his Moncloa Palace Madrid residence after he speaks to lawmakers and reporters.

Debt Deepens

A five-year slump in the euro region’s fourth-largest economy has led it to miss all its targets since 2009, when overspending peaked at 11.2 percent of GDP.

“You can see for yourself that international organizations aren’t asking us to implement more measures,” Montoro said. “It could fuel more economic recession.”

Fiscal slippage has fueled a surge in Spain’s public debt load, which has more than doubled since the end of a real- estate-fueled boom in 2008. The European Union’s statistics office, Eurostat, forecasts it’ll overshoot the euro region’s average next year, at 97.1 percent of GDP.

While the commission’s last report in November pointed to risks in Rajoy’s 2013 budget plan and recommended more cuts for 2014, EU Economic and Monetary Affairs Commissioner Olli Rehn signaled on Jan. 28 he may seek to ease austerity prescriptions for Spain.

The policy recommendations are due in May, after the Brussels-based commission updates its growth and deficit forecasts on Feb. 22, and Eurostat releases the first of its biannual government debt and deficit estimates in April.

To contact the reporter on this story: Angeline Benoit in Madrid at abenoit4@bloomberg.net

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

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