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Euro zone ministers to sign off Greek cash, grill Spain
* Finance ministers to approve second Greek bailout
* Ministers to grill Spain on bid to soften deficit targets
* Euro bailout fund size to be discussed, no decision likely yet
By Jan Strupczewski
BRUSSELS, March 12 (Reuters) - Euro zone finance ministers will sign off on a second bailout package for Greece on Monday and shift their focus to Spain, whose government looks set to violate newly-agreed EU budget rules by missing its deficit target again this year.
The bloc's original problem debtor, Greece, swapped its privately held bonds over the weekend for new, longer maturity paper with less than half the nominal value, slashing more than 100 billion euros ($130 billion) from its debt.
This paves the way for euro zone ministers to give the final go-ahead to a 130-billion-euro package to finance Athens through 2014, after they decided on Friday that Greece - its economy shrunk by repeated austerity measures - had met all their conditions.
But as Greece's financial problems shed some urgency, Spain has thrown down a new challenge. After announcing the previous government missed its 2011 budget deficit target by a significant margin, the new administration added it would not meet the agreed deficit goal for this year either.
"Spain will be subject to serious discussion today, both because of the method and the substance of their announcement," said one euro zone official involved in the preparation of the ministers' discussions.
Spain, the euro zone's fourth biggest economy, was quick to impose austerity measures to protect itself from the euro debt crisis. It planned to cut its budget shortfall to 6 percent of gross domestic product (GDP) in 2011, but reported an 8.5 percent shortfall instead. In 2012, it was to cut the deficit to 4.4 percent, according to a path agreed with EU finance ministers.
But with unemployment at 23 percent and rising, Spain's new government announced earlier this month that it would aim only for a cut to 5.8 percent, while still maintaining a 2013 goal of 3.0 percent.
"They will have to be questioned, I think there are no real reasons for missing the target this year," a second euro zone official involved in the preparations said.
The European Commission expects Spain's economy to contract 1 percent this year after growth of 0.7 percent in 2011, a sharp downward revision from the last forecast of 0.7 percent growth.
"The worse deficit performance in 2011 is not due to worse growth, but to lax fiscal policy," a third euro zone official said. "And catching up in 2012 is then hampered by the poor expected growth, so solutions are not easy."
CREDIBILITY OF RULES VS ECONOMIC SENSE
Euro zone officials are worried that allowing Spain to soften this year's target would create a dangerous precedent and undermine the credibility of the European Union's recently sharpened budget rules.
Belgium at the weekend said it was sticking to its deficit goals and came up with nearly 2 billion euros of extra spending cuts to make the target, putting pressure on Spain to stick to its agreed plan. Portugal is also fixed on meeting its targets.
A more strict Stability and Growth Pact, which came into force in December, envisages fines for euro zone countries like Spain which are already running deficits above the EU ceiling of 3 percent of GDP and missing their deficit reduction targets.
It will be difficult for Spain's ministers to explain why the country should get gentler treatment than other member states.
On the other hand, forcing more austerity on a country already in recession could be difficult to justify economically and Spain insists it will meet the ultimate target of bringing the deficit down to 3 percent in 2013.
"Spain will be a very difficult case," the first official said. "The 2013 deficit reduction target will have to be ensured," they said, adding that more data and clarifications were needed to decide whether the European Commission should fine Spain.
The euro zone is keen for Spain to cut its deficit to show markets that it is serious about putting its public finances in order and to ease concerns that more countries will be forced to ask for euro zone emergency financing.
After two years when the EU has preached budget pain as the only cure for the excessive spending that fuelled the sovereign debt crisis, showing leniency to Spain would be tantamount to waving a red flag in front of sceptical financial markets.
The ministers will discuss whether to allow their temporary and permanent bailout funds, the EFSF and ESM respectively, to run alongside each other for a year from July, with a maximum joint capacity of around 750 billion euros.
But a decision on this is likely to be made only at another meeting at the end of the month.
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