* Ministers demand deeper Spanish cuts in 2012 but focus on
* Greek rescue package approved, to be signed off on
By John O'Donnell and Jan Strupczewski
BRUSSELS, March 12 Euro zone finance
ministers gave their final approval to a second bailout for
Greece on Monday and turned their fire on Spain, demanding it
aim for a tougher deficit target this year in order to get back
on target in 2013.
Greece, the source of the currency bloc's debt crisis,
swapped its privately held bonds at the weekend for new, longer
maturity paper with less than half the nominal value, a move
that cut its debts by more than 100 billion euros.
The exchange paved the way for euro zone ministers to give
the final political go-ahead to a 130 billion euro package that
aims to finance Athens until 2014. The decision will be
formalised by junior officials on Wednesday.
"As agreed, new official financing of 130 billion euros will
be committed by the euro area and the IMF for the period
2012-2014," Jean-Claude Juncker, who chairs the Eurogroup of
euro zone finance ministers, told a news conference.
Thanks to a high take-up of the bond swap offer, Greece's
debt would fall below a target of 120 percent of GDP in 2020,
reaching 117 percent, from 160 percent now, he said.
As Greece's financial problems have lost some urgency, Spain
has raised a new challenge. After announcing the previous
government had missed its 2011 budget deficit target by a
significant margin, the new administration said it would not
meet the EU-agreed deficit goal for this year either.
Spain was supposed to cut its deficit to 4.4 percent of
gross domestic product this year, but said it would only aim for
5.8 percent as it heads into recession. Its deficit in 2011 was
8.5 percent, far above a 6.0 percent goal.
In a statement, the Eurogroup said Spain should
strive for a 5.3 percent deficit target this year, cutting it
some slack from the initial goal but keeping the pressure on.
"The Spanish government expressed its readiness to consider
this in the further budgetary process," it said.
The euro zone is keen that Spain, a far bigger
economy than Greece which has so far avoided the need for a
bailout, gives the financial markets no whiff of backsliding
after Athens has been taken off the critical list, for now at
"It will be the responsibility of the Spanish authorities to
choose the initiatives that will have to be taken in order to
bring down the budgetary deficit in 2012, what is most important
is what is the target for 2013," Juncker said.
"What is less important, but nevertheless important, are the
avenues chosen in 2012."
Madrid pledged it would cut the deficit to 3
percent of GDP next year, in line with the agreed final
deadline, but wanted the higher starting point and slower
economic growth to be taken into account in determining the path
"Spain's position is that two things have changed. The
first: last year there was a deviation of 2.5 percent in the
public deficit and the second: that the circumstances in terms
of economic growth have changed significantly," Spanish Economy
Minister Luis de Guindos said.
"Spain's commitment to the fiscal rules is absolute."
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 for 0.7 percent growth.
Several other euro zone countries have committed themselves
to meeting budget targets.
Belgium said at the weekend it was sticking to its deficit
goals and came up with nearly 2 billion euros of extra spending
cuts to make the target - a move that could add to pressure on
Spain to stick to its agreed plan. Portugal and the Netherlands
are also fixed on meeting their targets.
A stricter EU 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 3 percent of
GDP ceiling and missing their deficit reduction targets.
Economists believe fierce deficit cutting could be self
"Given the country's still relatively favourable debt
position, we think that a crash fiscal retrenchment should not
be the government's top priority," said Deutsche Bank economist
He said Spain was successfully addressing its key problem
which was its rigid labour market but that the lower wages that
could result would likely depress domestic demand further.
"We believe it may be unwise to "front-load" the necessary
fiscal adjustment in these circumstances," Moec said. "Waiting
for the recovery to take hold in 2013 may ultimately be more
beneficial to the underlying state of Spanish public finances."