Government reveals 4 billion-euro margin to deal with deficit

The Spanish government has a cushion of some 4 billion euros that will allow it to meet its budget deficit target for this year despite the decision to freeze privatizations and the chance the regions might fail to sufficiently rein in spending, Economy Minister Elena Salgado said Friday.

The minister said the state received 1.8 billion euros from the recent telecommunications spectrum sales and expects to take in 200 million euros more from further sales in the coming weeks.

She also revealed that the state had saved an additional 2 billion euros as a result of borrowing costs being lower than initially estimated.

The minister said the government's commitment to reducing the budget deficit to 6 percent of GDP from 11.1 percent last year is "absolute."

The government planned to raise some 12-13 billion euros this year from the sale of a 30-percent stake in the state lottery company Loterías y Apuestas del Estado (LAE), and from the privatization of the airports of Madrid Barajas and Barcelona El Prat.

However, it decided not to proceed with the initial public offering of LAE because of poor market conditions, the same reason why the privatization of the airports was put off until next year to allow companies more time to raise funding for their bids.

Public Works Minister José Blanco on Friday explained the delay in the tender for the two airports would ensure maximum competition in the bidding process.

The Cabinet on Friday approved an additional 654 million euros in spending cuts at government ministries to cover outlays that were not foreseen in this year's budget.

The Cabinet also approved a decree that will effectively make the banks themselves foot the bill for any losses occurred in the rescue of lenders in the sector.

The decree calls for the country's three bank deposit guarantee funds - financed separately by savings banks, commercial banks and credit cooperatives - to be merged into one. The combined fund will then be tapped to cover possible losses from bank bailouts.

The state injected 2.8 billion euros into failed savings bank Caja del Mediterráneo (CAM), which the government has indicated will effectively be written off as a loss. The merged fund has assets of 6.593 billion euros.

Salgado said that through this arrangement taxpayers would not be saddled with any losses, while the public deficit would not be impacted.

Bank recapitalization

Referring to calls by the presidents of the European Commission and the European Central Bank, José Manuel Durão Barroso and Jean-Claude Trichet, Salgado said the big Spanish banks already comfortably cover European solvency requirements.

Salgado said that while there is a consensus with the European Union on the need for the biggest banks that present a systemic risk to have more capital - as indicated by the Basle III agreement - Spain had already addressed the issue of bank recapitalization.