Spain to miss deficit targets: central bank

Spain, which is fending off market fears it will need a financial bailout, will miss its public deficit targets for this year and the next, the country’s central bank forecast Wednesday.

The bank’s prediction came as financial daily Expansion reported that plans to marry four regional Spanish savings banks and create a new group, Banco Base, are likely to be scrapped due to a disgreement over money.

Spain’s regional savings banks are weighed down by loans that turned sour after the collapse of a housing bubble in 2008 and are at the heart of fears the country could follow Greece and Ireland in needing an EU-IMF bailout.

In its latest economic bulletin, the Bank of Spain estimated the nation’s public deficit will be equal to 6.2 percent of output this year before falling to 5.2 percent on 2012.

The government predicts the deficit will hit 6.0 percent of output in 2011 and 4.4 percent next year.

The central bank said the difference in its estimate for the public deficit was mainly due to its lower growth forecasts.

It predicts the economy, Europe’s fifth largest, will grow by 0.8 percent in 2011 and 1.5 percent in 2012, well below the government’s forecasts of 1.3 percent growth this year and 2.5 percent in 2012.

“The Spanish economy is still in a difficult situation requiring the pursuit of ambitious and demanding policies to correct the fiscal imbalances, while pressing ahead with structural reforms conducive to growth and with the restructuring and recapitalisation of the banking system,” the bank said.

The government has slashed spending and passed pension reforms in its effort to ward off market concerns that its public deficit is unsustainably high.

It has also reformed the labour market in an attempt to revive the economy and fight an unemployment rate of just over 20 percent, the highest in the industrialised world.

Prime Minister Jose Luis Rodriguez Zapatero announced at an EU summit in Brussels last week that Spain will introduce a bill that will force the central government to limit total spending as a percentage of GDP.

He also said his government was confident it will complete a pending reform to the nation’s collective bargaining system by late April and would step up the fight against black market jobs and tax evasion.

During a debate in parliament on Wednesday, Zapatero said illegal hiring “clearly prejudices the whole of the Spanish economy”.

He said companies that respect the law “find themselves faced with unfair competition” while employees who do not pay contributions “are deprived of social and labour protection”.

According to the most recent figures released by the Gestha union of tax inspectors, the black economy represented 23.3 percent of Spain’s economic output in 2009, or 244.9 billion euros ($344.7 billion).

The government has also encouraged reform of the banking sector but the report in Expansion suggests the process is poised for a setback.

The newspaper said three of the partners which agreed to create Banco Base — Cajastur, Caja Cantabria and Caja Extremadura — would reject the terms of the alliance in meetings Wednesday “unless there is a last-minute surprise”.

It would be the first broken-off engagement in the savings bank sector since a wave of consolidations in 2010 cut the number of institutions from 45 to just 14.

The Spanish economy, Europe’s fifth largest, contracted by 0.1 percent in 2010 after shrinking 3.7 percent in the previous year.

Spain along with Greece and Ireland were the only eurozone economies to shrink in 2010.