UPDATE 2-Spain deficit alert underlines economy risks

(Adds Solbes, analyst comment, context)

By Paul Day

MADRID, July 22 (Reuters) - Spain's public finances may slip into deficit for the first time in four years in 2008, Economy Minister Pedro Solbes said on Tuesday, adding to concerns that the economy is in rapid decline.

"If growth is clearly below 2.3 percent (in 2008) we are going to have a slight deficit," Solbes said during an economic seminar.

Spain's government had previously flagged a risk of deficit in 2009. Solbes said the faster-than-expected deterioration in public accounts was no cause for concern.

"I see the surplus as an instrument rather than an end in itself. It has to exist when the economy is growing, and since spending will go up as the economy shrinks, we'll have a higher deficit. This is normal and doesn't especially worry me," Solbes said.

Analysts were less confident and said Spain's failure to place a 15-year bond this month should be taken as a warning that foreign investors are increasingly bearish.

"This isn't a soft landing as we expected. This looks more like a freefall," said Jose Garcia Zarate, economist for 4Cast. "There is a growing worry that there may be a debt rating downgrade if the government doesn't do something to combat the slowdown."

For the moment, Spain's public deficit to gross domestic product (GDP) ratio remains very low and any real threat to its AAA debt rating is unlikely, he added.

NOT SO SUNNY SPAIN

Solbes says Spain is suffering an exceptionally complex economic crisis as it is hit by a severe housing downturn, the global credit crunch and soaring raw material prices.

He expects growth to plummet to around 2 percent this year from 3.8 percent in 2007 and will revise official forecasts in the next few days.

Even tourism, Spain's second largest earner after construction, is flagging. June hotel stays fell 2.3 percent year-on-year, after growth of 6.6 percent a month earlier.

Spain's best source of sun-starved tourists, the United Kingdom, has suffered its own economic slowdown and the number of Britons visiting Spain fell 4.8 percent in June from a year earlier. Tourism accounts for around 11 percent of Spanish GDP.

Spanish house building, which drives around half the construction sector, collapsed this year as firms ran out of customers and credit.

Spain's largest property developer Martinsa Fadesa (MFAD.MC) defaulted on its 5.2 billion debt load last week as private banks and the state credit agency refused to grant a bail out.

Shares in Spain's largest company Telefonica (TEF.MC) hit a 12-month low on Tuesday as Spain's problems spread beyond housing into the rest of the economy.

BAD JOBS DATA

Unemployment data due on Thursday is likely to further slam consumer confidence, which is already at a record low.

Spain's second quarter jobless rate is expected to rise to 10 percent from 9.6 percent, a Reuters survey showed ECONES.

Solbes previously forecast Spanish unemployment would rise to 10 percent by the end of 2009, and not go beyond that.

Private sector analysts say Spain's jobless rate could reach 15 percent by next year.

BNP Paribas is among investment banks that forecast Spain will fall into recession during the second half of this year. It sees the economy contracting 0.75 percent in 2009.

"The credit crunch and rapid increase in headline inflation have burst the Spanish housing and debt bubbles," BNP analyst Dominic Bryant said in a research note.

(Reporting by Paul Day; Editing by Ruth Pitchford)