Spain faces "unprecedented" deficit challenge: Moody's

9th January 2012, Comments 0 comments

Spain must squeeze an "unprecedented" 40 billion euros ($51 billion) out of the budget in 2012 so as to meet its deficit-cutting target, Moody's warned Monday.

The New York-based rating agency said the new right-leaning Spanish government faced a much tougher task in 2012 because of a significant budget overrun in 2011.

The government announced December 30 that Spain's public deficit would come in at 8.0 percent of gross domestic product in 2011, down from 9.3 percent in 2010 but way above the official 6.0-percent target.

"The large fiscal deficit in 2011 is credit negative and clearly illustrates the challenge facing authorities in bringing Spain's finances back onto a sustainable path," Moody's Investors Service said.

Prime Minister Mariano Rajoy's Popular Party government has promised to stick to a 2012 target of cutting the deficit to 4.4 percent of GDP.

"Achieving this year's unchanged budget deficit target of 4.4 percent of GDP for the general government sector requires an unprecedented effort," Moody's said in a report.

"Under our assumptions the required adjustment is around 40 billion euros."

That compared to a deficit reduction of about 28 billion euros in 2010 and 2011 combined, it said.

"Achieving such a massive fiscal adjustment amid slowing economic growth risks exacerbating the negative economic outlook," Moody's said.

It forecast the Spanish economy would shrink by 0.5-1.0 percent in 2012 after growing 0.7 percent in 2011.

The government, which won power in November 20 elections, has announced spending cuts of 8.9 billion euros, including a public sector wage freeze, and tax increases to bring in 6.275 billion euros.

Combined, those measures added up to about 15.2 billion euros, or 1.5 percent of GDP, Moody's said.

In addition, the government said last week it aimed to recoup 8.17 billion euros this year by fighting tax fraud, in particular boosting the number of tax inspectors and limiting the size of cash payments.

"However, such revenues are notoriously difficult to estimate and recover," Moody's said.

The new government's swift action showed its commitment to repairing state finances but more measures would be needed to bring Spain back to a sustainable path, Moody's said.

The eurozone sovereign debt crisis further complicated the task ahead.

"The longer the sovereign and bank funding markets remain volatile, the more likely it is that further credit pressures will develop for most euro area countries," Moody's said.

Without quick action to "significantly stabilise" credit markets, "we have indicated we will need to revisit our sovereign ratings, which could lead us to reposition a large number of EU sovereign ratings," it added.

© 2012 AFP

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