UPDATE 3-Spain to put debt cap in constitution by Nov

Tue Aug 23, 2011 9:17am EDT

Related Topics

* Spain to push through debt ceiling before elections

* Extra austerity measures approved in parliament

* T-bill auction sees solid demand, yields drop

(Adds measures passed in parliament, comment on growth)

By Paul Day and Nigel Davies

MADRID, Aug 23 (Reuters) - Spain plans to put a constitutional cap on public debt before elections in November, part of a latest raft of measures aimed at proving it has its finances under control.

The move follows calls by Germany and France last week for the countries struggling in the euro zone's debt crisis to put in place obligatory limits on deficits as part of moves to regain the confidence of financial markets.

Prime Minister Jose Luis Rodriguez Zapatero said the proposal, which would have full backing from the opposition People's Party (PP), would show Spain's commitment to sustainable finances in the medium and long term.

"The sense of this initiative is in line with others we have announced: it implies the commitment with the need of definitive consolidation of the Economic and Monetary Union, and it represents a step toward strengthening confidence in the medium- and long-term stability in the Spanish economy," Zapatero said.

The Socialist leader was in parliament to explain savings measures, voted through on Tuesday, worth 5 billion euros ($7.04 billion) this year and aimed at guaranteeing the government will hit its deficit target of 6 percent of gross domestic product.

Immediate pressure on Spain and Italy in the euro zone crisis has eased thanks to almost 40 billion euros in bond-buying by the European Central Bank this month.

But analysts say the crisis almost certainly has further to run given policymakers' reluctance to embrace deeper reform of the euro zone, with Spain among the first in the firing line if markets push borrowing costs higher.

Madrid's latest austerity measures, which include cuts to pharmaceutical budget costs, and tax changes to the calendar of payments made by large companies, would act as a buffer to deficit reduction plans, Zapatero said.

"This is the additional margin needed to meet the 6 percent target this year," he said.

The additional measures may well prove essential given doubts Spain's economy can grow by an official forecast of 1.3 percent this year. Zapatero did not answer the opposition's question as to whether the government stuck to that forecast.

Economists have warned that over-spending by the country's 17 regional governments could mean the government misses its deficit target this year, with the Bank of Spain forecasting a shortfall of 6.2 percent of GDP.

The 5 billion euros of savings from the latest measures amount to around 0.5 percent of GDP.

FURTHER MEASURES

Zapatero said the government would approve new steps to stimulate the labour market on Friday. Spain's unemployment rate is more than double the European average at 21 percent and nearly half of people under-25 are out of work.

The measures will include changes to temporary work contracts for young people into indefinite training contracts, and measures to help young people re-train in other sectors.

Meanwhile, Spain's Treasury saw solid demand for a short-term T-bill sale on Tuesday, supported by the European Central Bank's bond-buying programme.

Average yields on the 3-month bill were at their lowest since March at 1.357 percent, though a long way above yields of around 0.3 percent paid before the euro zone debt crisis began.

Zapatero also said the recent rise in the spreads of Spanish sovereign debt against German debt -- which reached euro-era highs of over 400 basis points before the ECB bond-buying plan began on Aug 8 -- were not justified.

"In the euro zone sovereign debt markets uncertainties have been the cause of important fluctuations in risk premiums and lead to worrying and unjustified spreads for countries like Spain and Italy," Zapatero said.

Economists say the euro zone's debt crisis still has further to run given the reluctance of Germany and France to take more radical measures and the prospect of chronically low growth in many countries for years to come.

Zapatero said that Spain's economy was growing despite the extreme market volatility but the turbulence threatens to prolong the country's own crisis.

(Reporting by Paul Day and Nigel Davies; Additional reporting by Tracy Rucinski; editing by Stephen Nisbet/Patrick Graham) ($1=.7099 Euro)

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.