Euro zone finance ministers push Spain on budget cuts

Tue, Mar 13, 2012, 00:00

Euro zone finance ministers have pressured Spain to make deeper budget cuts, as they gave their final approval to a second bailout for Greece today, in a first test of stiffer deficit rules designed to prevent the region's debt crisis from flaring back up.

Spain's forthcoming budget was the prime focus as the ministers met in Brussels yesterday after Madrid declared this year’s deficit will be higher than the EU target. They also took stock of Greece’s huge debt restructuring last week, said euro group president Jean-Claude Juncker.

Given the ongoing effort to toughen the enforcement of EU budget rules in the fiscal treaty, the unilateral declaration by Spanish prime minister Mariano Rajoy is seen in European circles as an act of bad faith. In question now is whether other member states agree to relax this year’s target and whether next year’s target can be sustained in that event.

Greece, the source of the currency area's debt crisis, swapped its privately held bonds at the weekend for new, longer maturity paper with less than half the nominal value, a move that cut its debts by more than €100 billion.

The euro zone ministers today gave the final political go-ahead to a €130 billion package that aims to finance Athens until 2014. The decision will be formalised by junior officials tomorrow.

"As agreed, new official financing of €130 billion will be committed by the euro area and the IMF for the period 2012-2014," Mr Juncker told a news conference today. Thanks to a high take-up of the bond swap offer, Greece's debt would fall below a target of 120 per cent of GDP in 2020, reaching 117 per cent, from 160 per cent now, he said.

Some countries are already resisting any leeway for Spain, saying it is important to demonstrate the EU’s newly reinforced budget-surveillance system works in practice. All governments were obliged to maintain their fiscal targets, said Austrian minister Maria Fekter.