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Spain likely to need bailout this year: Citi

Spain will likely need emergency help from international lenders this year to shore up its banks and public finances, a leading economist at major financial group Citi said on Wednesday.

“Spain looks likely to enter some form of a troika programme this year” as a condition for the European Central Bank to keep supporting it by lending to it on favourable terms, Citi’s chief economist Willem Buiter said in a note.

The “troika” refers to the European Union, European Central Bank and International Monetary Fund, which jointly provided funds to Greece, Ireland and Portugal to save them from financial collapse.

Tension on the financial markets that lend to Spain eased in recent months after the ECB provided massive liquidity but jitters have returned in past weeks.

Under pressure from European authorities and financial markets to reduce its public deficit, Spain this month agreed with EU leaders to cut the shortfall to 5.3 percent of gross domestic product this year — still well above the previous target of 4.4 percent.

“The compromise 5.3 percent of GDP deficit target for 2012 and the unchanged 3.0 percent target for 2013 seem unlikely to be realised in our analysis,” Buiter wrote in a report.

Spain’s conservative government under Prime Minister Mariano Rajoy, in office since December, is due to present in its 2012 budget on Friday details of the spending cuts that it hopes will narrow the deficit.

It has so far this year confirmed 8.9 billion euros’ worth of spending cuts and 6.3 billion euros in tax rises, but economists say total cuts worth more than 50 billion euros are needed.

The Citi report forecast a 2.7 percent contraction this year in the Spanish economy, which entered recession this quarter according to Spain’s central bank. The government officially forecasts a 1.7 contraction this year.

It also warned that Spain must tackle its level of debt which may be higher than previously thought.

“Sovereign debt restructuring is avoidable,” Citi wrote, but warned that to do so “would require more radical fiscal and structural measures.

“The new government has been active in structural reform but has missed an opportunity to address fiscal austerity in its first 100 days in office.”