Spain warns of spiralling debt

Spain's public debt will jump to its highest level since at least 1990 this year as the economy sinks into recession, the government said in its budget today, worrying investors who sold Spanish bonds.

Spain is under intense pressure from the European Union and investors to drastically cut its deficit and prove it will be able to repay its debt without asking for outside help.

Analysts say it will struggle to meet this year's deficit target despite new budget cuts. Investors are worried the euro zone's debt problems are returning, sending the premium they demand to hold Spanish and Italian bonds higher today.

Spain's debt-to-gross domestic product ratio will soar to 79.8 per cent in 2012, below the European average but a big rise from 68.5 per cent last year, the budget documents showed.

Final parliamentary adoption of the budget could be delayed until June but a senior European central banker said this was too late, reflecting growing concern among policymakers.

"I understand that everyone's in a hurry. We are too," treasury minister Cristobal Montoro said as he presented the plan to parliament.

He said many of the measures in the budget, which aims to save €27 billion, are already in place.

European Central Bank board member Joerg Asmussen said on Friday the government must speed up the parliamentary process.

"The aim is that the budget can have an impact over as much of the current year as possible," he told journalists on the sidelines of a meeting of EU finance ministers and central bankers in Copenhagen, expressing a view widely shared among top EU officials.

Spaniards have been fairly tolerant of his austerity but thousands turned out for a general strike last Thursday in a sign patience may be wearing thin.

"The challenge of this budget is to recover the confidence of our European partners, of European institutions, of investors in Spain," Mr Montoro said.

The government said the rising debt-to-GDP ratio was due to high borrowing costs as well as the cost of the bank rescue fund, the power tariff deficit fund, the fund to help regions pay service providers and Spain's payment to the Greek bailout.

Investor confidence in Spain has improved since the height of the euro zone debt crisis last summer as a second rescue package for Greece was approved.

But the premium investors demand to hold Spanish over German debt has started to climb again in recent weeks. Spanish and Italian 10-year yield spreads over Bunds widened by up to 8 basis points today.

"We have deteriorating news from the (euro zone) periphery. I don't think the market like the Spanish budget too much...Some of the data there is pretty weak," said one trader.

Spain must reduce its deficit to 5.3 per cent of GDP this year and to the EU limit of 3 per cent of GDP in 2013 from 8.5 per cent last year.

Reuters