August 26, 2011 / 8:37 AM / 8 years ago

UPDATE 5-Spain to set deficit limit as growth slows

Aug 26 (Reuters) - * Spain govt, opposition agree to cap deficit, debt

* Law to cap structural deficit at 0.4 pct of GDP from 2020

* Will allow for fiscal flexibility in times of crisis

* Measures announced to stimulate youth jobs

* GDP growth slows in Q2 vs Q1

(Adds jobs measures )

By Paul Day and Judy MacInnes

MADRID, Aug 26 (Reuters) - Spain reached political consensus on Friday to set constitutional limits on its public deficit and debt, though there were few signs the accord would persuade markets Madrid can manage its finances as growth slows.

The constitutional amendment agreed by the country’s main parties will come into effect in 2020 and will not include specific deficit cap figures, the ruling Socialist party said in a statement early on Friday.

The deal follows calls by Germany and France for Spain and other states at the sharp end of the euro zone debt crisis to set binding limits on their deficits to regain the trust of investors.

Spanish debt prices were little changed after the announcement and one analyst said the news did little to alter the market’s view that Spain will struggle to keep a lid on its debts.

“In our opinion, the agreement according to the terms they’ve laid out doesn’t really offer credibility ... on the commitment to containing the deficit,” Spanish bank Banesto said in a note.

“Not so much because of the lack of a concrete numbers, but because they leave the door open to too many exceptions... as well as the possibility of changes in the future.”

The amendment must be approved before June 30, 2012, and will be accompanied by an ancillary law which will set a ceiling for the structural deficit — the fiscal gap over the course of a normal economic cycle — at 0.4 percent of gross domestic product (GDP).

Economy Minister Elena Salgado earlier this week defined normal growth as between 2-3 percent of GDP, but Spain has not seen annual growth top 1 percent since 2007 and economists fear market-pleasing austerity measures could choke future expansion.

“Spain has to tread a very careful line to assure its economy is not throttled by fiscal entrenchment. Growth, or the lack of it, has reared its ugly head and Spain is extremely mindful that it has to strike a balance,” economist at Spiro Strategy, Nicholas Spiro said.

Spain’s government announced measures on Friday aimed at improving job prospects for youth workers. Youth unemployment stands at 45 percent and is partly to blame for Spain’s lacklustre recovery.

Spanish GDP expanded at 0.2 percent in the second quarter from the first, half the rate registered in the Jan-March period, fuelling concerns Spain could slip back in to recession.

Economy Secretary Jose Manuel Campa said on Friday the government’s target of 1.3 percent this year is at risk because of external factors, a day after France, Spain’s largest trading partner, cut its own 2011 and 2012 growth forecasts.

DEEP-SEATED PROBLEMS REMAIN

In order to give the economy greater flexibility during times of crisis, parties to the agreement can revise the deficit caps in the ancillary law in 2015 and 2018, Friday’s announcement said.

Spain has slashed its headline public sector deficit, one of the highest in the euro zone, to an expected level of around 6 percent of GDP at the end of this year from 11.1 percent in 2009.

It has also pledged to bring the shortfall down to 3 percent of GDP by end-2013, in line with European Union guidelines, but market worries have still pushed the country’s debt yields to euro-era highs.

The constitutional amendment is only the second since Spain’s basic law was drawn up after the end of Francisco Franco’s dictatorship in 1978.

“Constitutional rules, if they’re well designed and have sufficient reach, are useful to improve economic governance. But they are useless if they don’t resolve structural problems in the economy,” Madrid-based think tank Fedea said in statement.

“There must be a reorientation of reforms of our labour market, financial system and education,” it added.

Prime Minister Jose Luis Rodriguez Zapatero, who will not be renewing his mandate as leader of the Socialists in November’s general election, said he wanted to set the constitutional debt cap before he left office.

(Additional reporting by Judy MacInnes and Nigel Davies; Editing by Alison Williams, John Stonestreet and Toby Chopra)

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