* Germany backs more time for Spain to meet deficit target
* Irish vote 60-40% "yes" to budget discipline treaty
* Markets more fearful of Greek, Spanish problems
* Final Greek polls show June 17 election on knife edge
By Noah Barkin and Padraic Halpin
BERLIN/DUBLIN, June 1 EU paymaster Germany
softened its drive for austerity across the euro zone on Friday,
agreeing to allow Spain more time to cut its deficit while its
battles a deepening bank crisis, capital flight and recession.
Irish voters backed a European budget discipline treaty by a
60-40 percent vote in a referendum, a widely expected result
that removed one political risk for the troubled currency area
but left several bigger ones.
Investors stampeded to safe-haven U.S. and German government
bonds amid growing worries over Spain's parlous finances and
debt-stricken Greece's uncertain future in the single currency
area, compounded by weak U.S. jobs data.
Asked about a European Commission call to grant Spain more
time to reduce its deficit, a German Finance Ministry spokesman
said Berlin understood Madrid's difficulties in trying to cut
its shortfall to 3 percent of gross domestic product in 2013.
"We support Spain in its efforts to implement the necessary
measures. But we also recognise that because of negative
economic developments it will be difficult for Spain to reach
its goals," spokesman Johannes Blankenheim told a news briefing.
Asked if that meant Madrid should be given more time, he
replied: "I think that's what I've been saying."
Until now, Germany has taken a hard line with states missing
agreed deficit targets, worried that accepting failure would
weaken the commitment to consolidate and hit market confidence.
But officials close to Chancellor Angela Merkel have told
Reuters that some budget goals now look unrealistic and need
adjusting to reflect unexpected economic weakness.
New French President Francois Hollande, Italian Prime
Minister Mario Monti, U.S. and IMF officials have called for an
easing of the austerity drive to refocus on getting the European
In Dublin, ministers voiced "a sigh of relief rather than
celebration" that Irish voters had approved the fiscal
discipline compact in the only plebiscite on the treaty in the
17-nation euro area.
The pact is meant to enforce EU deficit cutting rules more
strictly to prevent a repetition of the sovereign debt crisis,
but critics argue it is too rigid and could deepen recession if
Ireland has been held up by its European partners as the
model student for austerity, implementing an 85-billion euro
($106 billion) EU/IMF bailout to the letter as others, notably
Greece, remained the centre of euro zone debt concerns.
Financial markets are more worried about accelerating
capital flight from Spain, which is resisting pressure to seek
international assistance for its banks, and a repeat general
election in Greece on June 17 that could lead to that country
becoming the first to leave the euro area.
In another day of market turmoil, German bond yields fell to
all-time lows, with investors effectively paying Berlin to park
their money in its coffers at negative real interest rates,
while the borrowing costs of Spain and Italy are again becoming
The risk premium investors demand to hold Spanish 10-year
debt rather than German bonds rose on Friday to its highest
since the launch of the euro at 546 basis points.
Spain revealed on Thursday that investors had moved a record
net 66.4 billion euros ($82 billion) out of the country in March
alone, before the sudden nationalisation of ailing lender Bankia
, its fourth-largest bank.
Spanish Treasury Minister Cristobal Montoro sought to sooth
markets by reporting that the country's autonomous regions had
balanced their budgets in the first three months and were on
track to meet their 2012 deficit target of 1.5 percent of GDP.
The cabinet delayed plans to adopt a new mechanism to ease
their funding problems and boost their liquidity positions but
Montoro said he hoped to present the measure next week.
Overspending by the regions has been a big factor in the
country's fiscal problems, along with mountains of debt owed to
savings banks after a property bubble burst.
The European Commission, the European Central Bank, the
United States and International Monetary Fund have stepped up
pressure on euro zone leaders to adopt bolder measures, such as
a banking union and a joint deposit guarantee, to ensure the
But Germany, keen to limit liabilities to its own taxpayers,
has so far resisted such moves. Greater flexibility on deficit
reduction targets costs Berlin nothing.
Contradictory opinion polls ahead of the June 17 election in
Greece, the euro zone's most heavily indebted state, pointed to
a knife-edge race between supporters and opponents of the tough
terms of Athens' EU/IMF bailout.
In a sign of the depth of Greece's problems, the country's
power regulator told Reuters he had called an emergency meeting
next week to avert a collapse of the electricity and natural gas
system due to unpaid arrears owned by power producers.
A poll victory for the anti-austerity leftist SYRIZA party,
which wants to tear up the bailout agreement, could lead to the
country being forced out of the euro.
Most polls show the conservative pro-bailout New Democracy
party narrowly ahead of SYRIZA, one day before a ban on their
publication comes into force.
But one survey by the respected Public Issue agency gave the
leftist group led by charismatic Alexis Tsipras a six-point
lead, reflecting the angry and unpredictable mood of voters
exasperated with austerity and soaring unemployment but still
keen to stay in the euro area.
Greece's electoral system gives the winning party an extra
50 parliamentary seats, making it almost impossible for rivals
to form a government without it.
In a throwback, former Italian Prime Minister Silvio
Berlusconi, ousted last year after financial markets lost
confidence in his reform-shy government, said Italy should leave
the euro unless the ECB agreed to pump more cash into the
economy and guarantee government debts.
"We have to go to Europe and say forcefully that the ECB
should start printing money," Berlusconi said in an entry on his