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Spain Debt Reaches Record as Rajoy Becomes Crisis Focus: Economy

Prime Minister Mariano Rajoy
Prime Minister Mariano Rajoy spooked investors on March 2 when he defied European colleagues by loosening his deficit target for 2012 amid the second recession in as many years. Photographer: Jock Fistick/Bloomberg

Spain’s public-debt burden surged to the most in at least two decades, underlining concerns about its ability to reorder state finances as contagion from the debt crisis focuses on the euro area’s fourth-biggest economy.

The nation’s overall debt last year amounted to 68.5 percent of gross domestic product, exceeding the government’s forecast of 67.3 percent, data on the Bank of Spain’s website showed today. That compares with 66 percent in the third quarter and 61.2 percent at the end of 2010.

“Spain seems to be the main risk in the near future for Europe,” Stephane Deo, chief European economist at UBS AG, wrote in a note today. “There are enormous challenges ahead, including the debt-recession spiral in Portugal and Spain.”

Prime Minister Mariano Rajoy spooked investors on March 2 when he defied European colleagues by loosening his deficit target for 2012 amid the second recession in as many years. Even as the European Central Bank’s loans to banks prop up demand for Spanish bonds, the nation’s borrowing costs have risen 30 basis points since Rajoy’s comments.

The increase in Spanish debt was driven by the nation’s 17 semi-autonomous regional governments, whose borrowings swelled 17 percent from a year earlier as they overshot their budget-deficit goals.

Debt Forecast

The European Commission forecasts that Spain’s debt will have almost doubled to 78 percent of GDP by next year from where it was when Europe’s sovereign debt crisis began, as the country’s deficit-reduction efforts are hobbled by a relapse into recession. The International Monetary Fund expects the economy to contract 1.7 percent this year.

Euro-area finance chiefs agreed this week that Spain’s deficit goal for 2012 was unachievable after the shortfall came in at 8.5 percent of GDP last year, compared with a 6 percent target. For 2012, European finance ministers agreed to ease the goal to 5.3 percent from an initial 4.4 percent.

“So far the government has disappointed,” UBS’s Deo said. “An ambitious reduction of the deficit is needed.”

Elsewhere today, minutes of last month’s Bank of Japan meeting showed that board members are concerned that increased bond purchases by the central bank may be viewed as financing government deficit spending. They said it was important “to clearly recognize and explain to the public” that the purchases are not “for the purpose of monetization,” according to the document released on the BOJ website.

Singapore Exports

Also in Asia, data in Singapore showed exports rebounded in February as shipments of pharmaceuticals and electronics surged. Non-oil domestic exports increased 30.5 percent from a year earlier, after a revised 2.4 percent drop in January, the trade promotion agency said in a statement. The median of 16 estimates in a Bloomberg News survey was for a 16.2 percent gain.

In Europe, data from the European Union’s statistics office showed that exports rose for a third month in January, adding to signs the region’s economy is regaining strength after shrinking in the fourth quarter. Exports from the euro-area advanced a seasonally adjusted 1.3 percent from December, when they increased 0.9 percent.

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