Spain's public deficit for 2011 may be higher than the 8 percent of GDP forecast by the new government, the economy minister said on Monday, fuelling fears the country faces a prolonged period of tight budgets and economic contraction.
Spain had originally targeted a 2011 deficit of 6 percent of gross domestic product, but the newly elected conservatives said on Friday the deficit would be 8 percent. It said it would now have to work hard to hit this year's tough deficit-reduction goals in an economy seen tipping back into recession this quarter and announced new tax rises and spending cuts.
We'll need to see, but it's possible that we have gone over the 8 percent mark, though (we) expect that it hasn't done so by much, Economy Minister Luis de Guindos said during an interview with Cadena Ser radio, his first since taking the post after the conservatives won the November election.
Friday's announcement that the deficit would be as high as 8 percent of GDP has reignited market concerns about the financing needs of indebted euro zone countries and put downward pressure on the euro, which hit a decade low versus the yen on Monday.
Guindos said Spain's economy may contract in the first quarter of 2012 after shrinking in the previous three months, in line with analyst expectations that the euro zone's fourth-largest economy is already in recession.
Spain has been a focal point of the debt crisis as the previous Socialist government fought to deflate one of the highest public deficits in the currency bloc by introducing massive spending cuts and tax hikes.
Spain's manufacturing slump showed no sign of letting up in December, adding to expectations the battered economy will shrink in the next few quarters, a purchasing managers' survey showed on Monday.
The government announced additional tax hikes on Friday worth an estimated 6 billion euros (5.02 billion pounds) a year and spending cuts worth 8.9 billion euros, with which it aims to reduce the deficit by 1 percentage point in the short term.
Treasury Minister Cristobal Montoro, speaking at a separate event in Madrid on Monday, said the government would announce new economic measures on Thursday after the weekly cabinet meeting, but these would not include further spending cuts.
The premium fixed income traders demand to hold Spanish over German debt dropped by 3 basis points to around 329 bps on Monday from settlement on Friday, but trade was thin with London markets closed until Tuesday.
The measures announced by the government don't seem to have had an effect, for good or bad. Tomorrow will be the test, but I don't think the market will react much. The tax hikes and cuts have been more or less discounted, a Madrid-based trader said.
Measures to balance the public accounts will be accompanied by structural reforms which will help restart the stalled economy, Guindos said.
The government has a very aggressive reformist agenda for the next few weeks and months, in the labour market, the financial system, in the goods and services markets and competitiveness, he said.
The austerity measures announced last week are the first of many, Deputy Prime Minister Soraya Saenz de Santamaria said. The government must find savings worth more than 35 billion euros in 2012 to meet its deficit goal of 4.4 percent of GDP.
With these measures, we're not very optimistic on the growth prospects for this year. We expect the economy to contract by more than 2 percent, but it all depends on financing costs, economist at Citi Jose Luis Martinez said.
If the deficit-cutting measures change the market perception, the economic contraction could be less. If not, probably more.
The debt crisis and concerns over the health of Spain's accounts has closed bond markets to all but a few Spanish companies and banks, causing bank loans to dry up and making financing impossible for small and medium-sized companies.
Mass lay-offs by struggling businesses and a labour market hit by the dual slump in the construction and service industries has left 5 million Spaniards unemployed, accounting for almost a third of all jobless in the entire 17-country euro zone.
Spaniards, which handed the government of Prime Minister Mariano Rajoy the largest parliamentary majority in 30 years in the November election, are largely resigned to a tough few years, according to polls.
Almost half of people surveyed by Sigma Dos for El Mundo did not expect an economic recovery until after 2013, according to a poll published on Sunday.
Only 15.1 percent said they expected some recovery this year, while 37 percent believed the Spanish economy would fare worse in 2012 than in 2011.
(Additional reporting By Andres Gonzalez; Editing by Jose Elias Rodriguez; Editing by John Stonestreet and Susan Fenton)