Economy minister calls for slack on deficit targets

Comments come amid fears that activity will be dampened "The future of the euro is being played out in Spain,” says Luis de Guindos

Spanish Economy Minister Luis de Guindos told the European Parliament in Brussels on Monday that fiscal consolidation should be imposed gradually in order not to further damage the economy.

“We have to reduce the fiscal deficit at a sensible pace,” De Guindos said. “In the medium term we need sound public finances, but it has to be a sensible pace that doesn't create future problems, and everyone in the Eurogroup is on the same page in that regard."

De Guindos insisted that given the fact that Europe is in recession, deficit targets set should be viewed in structural as opposed to nominal terms.

He defended the government’s forecast of a contraction in the economy of only 0.5 percent next year, compared with the European Commission’s estimate of a fall of 1.4 percent, insisting that there are already some “positive signs” that point to a recovery in activity as a result of the reforms introduced by the administration of Prime Minister Mariano Rajoy.

“We are conscious that international forecasts for Spain are lower than our own forecasts,” he said. “But those forecasts are not written in stone. We are working on our economic program to meet our forecasts, which we consider to be realistic.”

"We see positive signs that indicate that our efforts to correct imbalances can, in the medium-term, start to produce results,” he added. De Guindos said that the government’s forecast of a current account surplus next year could even be met this year.

We see positive signs that our efforts to correct imbalances can start to produce results”

The minister argued that Spain already fulfills conditions in terms of fiscal adjustments and reforms that would be imposed if the country opts to seek a bailout from the European Stability Mechanism (ESM) to lower its borrowing costs. In any case, he added, Spain has already met its financing needs for this year.

De Guindos estimated that of the 100 billion euros the Eurogroup has pledged to Spain to recapitalize its banks, only 35 to 40 billion would be required. The loan was granted under very favorable conditions and would only increase Spain’s public debt levels by 3.5 percentage points of GDP.

The government is also setting up a so-called bad bank to absorb the toxic assets of Spain’s lenders, which largely derive from their exposure to the moribund real estate sector.

The general manager of the Orderly Bank Restructuring Fund (FROB), Antonio Carrascosa, which will help oversee the bad bank, said in Madrid on Monday it would be capitalized at five billion euros, including one billion of equity and four billion in subordinated debt.

The bank will absorb an initial 45 billion euros in assets from the four banks that have been nationalized. The bank will take on board up to 90 billion euros in assets.

“The combination of the capital injection and the bad bank should leave the process perfectly clear and create a much-healed, stronger financial sector,” De Guindos said in Brussels, adding that the bad bank will be up and running at the start of next month.

De Guindos insisted that Spain’s risk premium was 200 basis points higher than it should be, not because of the country’s economic fundamentals but because of doubts about the future of the euro. "The future of the euro is being played out in Spain,” he said.

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