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Spain Debt Jumps Less Than Forecast as Crisis Weakens

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Premier Mariano Rajoy
Premier Mariano Rajoy is trying to persuade investors and euro zone peers he can foster a recovery in the second half this year after overshooting his budget-deficit target by more than 50 percent in 2012. Photographer: Angel Navarrete/Bloomberg

March 15 (Bloomberg) -- Spain’s 2012 public sector debt rose less than forecast by the European Commission, lending support to Premier Mariano Rajoy’s view that the euro region’s fourth-largest economy is past the worst of a six-year slump.

Borrowings rose 20 percent to 884.4 billion euros ($1.15 trillion) at the end of December from 736.5 billion euros a year earlier, according to the Madrid-based central bank’s estimate. That represents 84.1 percent of gross domestic product, up from 69.3 percent a year earlier and 77.3 percent in the third quarter. It is less than the commission’s forecast of 88.4 percent.

“This is another positive surprise after the deficit numbers,” said London-based senior economist at Berenberg Bank Christian Schulz in a telephone interview. “We may see revisions, but the key point is that progress is showing up in data, not only on competitiveness and exports, but also on the fiscal side.”

Rajoy is trying to persuade investors and euro zone peers he can foster a recovery in the second half this year after overshooting his budget-deficit target by more than 50 percent in 2012. The EU last month predicted Spain’s contraction will be almost three times the government’s 0.5 percent forecast.

No ‘Negative Surprises’

“Unlike last year, we’re not getting negative surprises and that should improve confidence and ultimately drive down borrowing costs for the government as well as the rest of the economy,” Schulz said.

A political stalemate in Italy hasn’t dented a rally in Spanish bonds, supported by Rajoy’s claim the budget gap fell to 6.7 percent last year, excluding bank aid, from 9 percent in 2011. That is less than an EU forecast of 7 percent. The yield on Spain’s 10-year benchmark bonds fell one basis point to 4.85 percent at 12:02 p.m. in Madrid, compared with a euro-era high of 7.75 percent in July. The spread with similar German maturities was at 339 basis points.

European stocks declined from a 4 1/2-year high after EU leaders meeting in Brussels loosened the shackles on national budgets as the euro-area recession deepens and before the single currency’s finance ministers gather at 5:00 p.m. today to deal with an aid package for Cyprus.

The Stoxx Europe 600 Index fell 0.2 percent to 297.79 at 11:23 a.m. in London. The Dow Jones Industrial Average extended the longest rally since 1996 yesterday. Futures on the Standard & Poor’s 500 Index lost 0.7 percent, while the MSCI Asia Pacific Index advanced 0.5 percent.

Biggest Challenge

European Central Bank President Mario Draghi has said restarting the euro-region economy is his biggest challenge in 2013 after stabilizing the bloc’s financial system last year by pledging to defend the euro. Output from the 17-nation currency union will shrink by 0.3 percent this year, the EU forecasts.

Spain’s debt load will beat the euro-area average for the first time in the currency’s history this year and top 100 percent of output in 2014, the commission says. Rated one to two steps above junk by three rating companies amid a sixth year of slump, Spain has so far avoided a full bailout helped by ECB support.

Indicators suggest activity may be improving after the recession deepened in the last quarter. The rise in jobless claims slowed in February, while industrial output declined less than expected in January. Data released today showed labor costs dropped 3.2 percent in the last quarter, the most since the start of the series in 2000. That has helped boost exports to the highest level on record last year.

Bank Aid

The central government last year accounted for most of the debt after it sought European aid for Spanish banks and backstopped the nation’s municipalities as well as its tax-funded pensions and jobless-benefit systems.

European aid for banks represents 3.9 percent of GDP, the Bank of Spain said. Debt and loans to bailout out the regions and municipalities contributed to the nation’s debt for 4.1 percent of GDP, including funding to help pay public suppliers and redeem bonds, it said.

“Pressure is likely to build,” London-based Bank of America Merrill Lynch analysts wrote in a note today. “We are still in the dark over how Spain will reduce its budget deficit to affordable levels over the next few years.”

Elsewhere in Europe, the euro-area inflation rate fell for a second month in February, led by price declines in the telecommunications industry. Annual consumer-price growth slowed to 1.8 percent from 2 percent in January, in line with an initial estimate on March 1.

Asia, U.S.

In the Asia-Pacific region, New Zealand’s central bank Governor Graeme Wheeler is considering Chinese-style lending restrictions to curb a housing boom.

In Singapore retail sales fell 2 percent in January from a year earlier, while home sales plunged 65 percent in February after the government introduced its seventh round of cooling measures in January. In the Philippines, unemployment climbed to 7.1 percent in January, government statistics showed.

U.S. consumer prices may have risen at a faster pace from a month earlier in February, a Bloomberg survey showed. An index of manufacturing activity in the New York region in March probably held near the highest since May 2012.

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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