Spain faces budget risks despite looser target: document

BRUSSELS Mon Jul 9, 2012 4:36pm EDT

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BRUSSELS (Reuters) - Looser budget deficit targets for Spain may still prove difficult to reach, according to an EU document that demands the country be subjected to three-monthly checks, a move that will tighten supervision of the euro zone's fourth-largest economy.

Europe is set to grant Spain an extra year to reach deficit targets laid down in EU law as the country grapples with recession and a banking crisis, diplomats said.

Although no final decision is expected at a Monday meeting of euro zone finance ministers, a wider gathering of EU finance chiefs on Tuesday is set to ease a debt goal that has pressured Madrid to make cuts blamed for exacerbating a recession.

"Spain's budget consolidation targets will be adjusted to give it an extra year," said one of the diplomats.

In a draft recommendation, officials underscored the extent of the difficulties facing the country, saying it could run into difficulty even in reaching its new goals this year.

The document, seen by Reuters, said Madrid must "stand ready to adopt further measures should risks to the budgetary plans materialize".

"This budget forecast is still subject to major risks," said the document, commenting on the new 2012 goal of a deficit of 6.3 percent of GDP. "A further deepening of the economic crisis and implementation risks at regional level ... could imply an even larger deviation," the document said.

"Spain is likely to fall back into recession and record negative annual economic growth in both 2012 and 2013," the document said.

The draft recommendation signaled there would also be closer monitoring of Spain, a move likely to be unpopular with the government of Prime Minister Mariano Rajoy, which has fought to lighten the conditions on Spain for aid to its banks.

"The Spanish authorities should report on progress ... every three months," said the document.

DIFFICULT PATH

Madrid was tasked with cutting its deficit to three percent of GDP next year. The Commission now envisages a level of 4.5 percent of GDP for 2013 and 2.8 percent for 2014 - eventually taking the country to within the EU's limit of 3 percent of gross domestic product.

Spanish Economy Minister Luis de Guindos will spell out to the finance ministers his government's plan for a package of up to 30 billion euros over several years, through spending cuts and tax increases that are due to be announced on Wednesday.

"The Commission has given its proposal, a new path of fiscal adjustment, and we will be analyzing the implications of that," he said as he arrived for Monday's meeting.

A decision on the full details of a bailout of up to 100 billion euros ($125 billion) Spain has requested for its banks is also due at the end of the month, De Guindos said.

A Spanish government source said it would sign a memorandum of understanding on Monday in Brussels regarding the rescue, which would be followed on July 20 by a full loan agreement. As part of that, it will agree to create a single "bad bank" to house toxic assets from its banking sector.

A key part of a plan agreed by euro zone leaders at a summit last month is to give the European Central Bank a central role in supervising banks, which would then allow the permanent euro zone rescue fund - the European Stability Mechanism (ESM)- to recapitalize banks directly instead of via governments.

German Finance Minister Wolfgang Schaeuble said that once this supervisory framework was in a place a decision could follow that would allow the ESM to help banks directly. (Reporting by Robin Emmott and John O'Donnell, editing by Mike Peacock)

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