* Spain to outline new package at Eurogroup meeting
* Move paves way for an extension on deficit target
* Brussels to propose 4.5%/GDP target next year, up from 3%
* Few other quick decisions to tackle crisis expected
By Robin Emmott and John O'Donnell
BRUSSELS, July 9 Europe will grant Spain an
extra year to reach its deficit targets after it outlines
further budget savings to finance ministers meeting in Brussels,
diplomats said on Monday.
Although no final decision is expected at a Monday meeting
of euro zone finance ministers on a bailout of Spain's banks, a
wider gathering of EU finance chiefs on Tuesday is set to ease a
debt goal that has pressured Madrid to make punishing cuts that
are exacerbating a recession.
"Spain's budget consolidation targets will be adjusted to
give it an extra year," said one of the diplomats.
"This is not a unilateral move. Spain needs to make the
necessary cuts to reach that goal and this will be discussed on
Tuesday at the Ecofin (meeting of ministers). I expect the extra
year to be granted."
Officials said the European Commission will propose a new
deficit goal of 6.3 percent of economic output for this year,
4.5 percent for 2013 and 2.8 percent for 2014.
Madrid had been due to reduce its budget deficit to 3
percent of gross domestic product by the end of 2013. But a deep
recession is putting that beyond reach.
The Commission will make the proposal to the EU's finance
ministers on Tuesday, who would then have to agree. At that
point it would become binding, two officials told Reuters.
Economy Minister Luis de Guindos will spell out to the
meeting his government's plan for a package of up to 30 billion
euros over several years through spending cuts and tax hikes
that are due to be announced this Wednesday.
A source close to the Spanish government said 10 billion
euros of cuts would come this year and that the measures would
include a VAT hike, reduced social security payments, reduced
unemployment benefits and changes to pensions calculations.
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 shortly.
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.
While Madrid strives to cut its debts and shore up its
struggling banks, it has consistently pleaded for help to get
down its borrowing costs. Spanish 10-year government bond yields
above seven percent are not sustainable indefinitely.
"At this moment the only institution that has enough money
to act is the ECB," Spanish Foreign Minister Jose Manuel
Garcia-Margallo said at a conference. "For that reason, the ECB
should intervene in markets, it should start massive purchases
of public debt so that speculators understand that they will
lose their bets against the euro."
The European Central Bank has proved markedly reluctant to
revive its bond-buying programme.
Alongside Spain, euro zone ministers will also be confronted
with the need to decide on a new structure for cross-border
banking supervision, how to use euro zone bailout money, aid to
Cyprus and whether to grant concessions to Greece, which has
admitted it is missing its bailout programme targets.
A key part of a plan agreed by euro zone leaders at a summit
last month is to give the ECB a central role in supervising
banks, which would then allow the permanent rescue fund - the
European Stability Mechanism (ESM)- to recapitalise banks
directly instead of via governments.
ECB President Mario Draghi testifies to the European
Parliament before ministers meet.
Leaders want to break the link between banks and sovereigns
by not lumbering governments with debts for rescuing their
lenders, making it harder for them to borrow.
They agreed to remove the ESM's preferred creditor status
when it lends to Spain, to calm investors who were worried they
would not be repaid money they had already lent.
They also decided that the ESM and the euro zone's temporary
bailout fund, the EFSF, can buy euro zone bonds at auction and
in the open market to lower borrowing costs, with some
conditions attached but without a full programme.
The ESM is due to start operating during the European
summer, but at least for now, countries will need to provide
guarantees in return for bank aid it gives, according to one
euro zone official who is involved in preparing the Eurogroup.
A spokesman for the European Commission said this would
change once a new supervisor for banks is in place, which is
expected next year.
Much depends on the ECB's crucial role as supervisor, which
will need to be grounded in European law. It falls to the
European Commission to propose such legislation, which is not
expected until at least September.
Despite the obstacles to the broad package outlined by
leaders, the range of measures agreed allow some short-term
action, although there is vocal opposition from the Netherlands
Helsinki insists that there was no agreement on bond-buying
by the ESM in secondary markets at the leaders' summit.
Coordinating euro zone finance ministers has been the job of
Luxembourg Prime Minister Jean-Claude Juncker since 2005, but
his terms ends on July 17 and ministers are due to discuss his
successor on Monday. However, confusion over who that is likely
to be means his term may be extended.
Ministers will discuss the findings of the "troika" of the
European Union, the European Central Bank and International
Monetary Fund from their first mission to Greece since the June
17 election. Another mission is due to return later in July.