Spain says rise in borrowing cost is 'short-term'

30th November 2010, Comments 0 comments

The widening gap between Spanish and benchmark German borrowing rates, which reached record highs on Tuesday, is a "short-term fluctuation", Spain's Deputy Finance Minister Jose Manuel Campa said.

"We cannot react to fluctuations of one or two days on the market, especially at times when, given the market tensions, there is a perception that liquidity is smaller than in normal market conditions," he told reporters.

"These are short-term fluctuations. We are currently in a period of turbulence. What is important is to execute planned policies and the markets will respond," he added.

The gap between Spanish and benchmark German borrowing rates widened to a record 3.0 percentage points on Tuesday, a day after the European Commission lowered its growth outlook for Spain for 2011 to 0.7 percent from an earlier forecast of 0.8 percent.

According to the report by the executive arm of the European Union, lower expected growth next year means that Spain's government budget deficit would be slightly higher than the 6.0 percent of GDP Madrid has targeted for next year.

Spain's risk premium has risen in the wake of Ireland's near-collapse, which has revived investors' concerns that Madrid will also need a bailout.

European Union and International Monetary Fund officials on Sunday approved a 85-billion-euro (113-billion-dollar) plan to to rescue Ireland's debt-ridden banking sector, six months after Greece received a similar bailout.

Spain's socialist government has introduced some politically sensitive measures aimed at reviving the economy and slashing its public deficit, including an overhaul of the country's rigid labour market rules.

The Spanish treasury has two more bond sales left in 2010. It will sell three-year debt on Thursday and 10- and 15-year bonds on December 16.

Finance Minister Elena Salgado said Friday that Spain would issue "slightly" less debt that originally planned at its remaining two bond issues because it has covered its financing needs for 2010 due to mostly reduced spending and higher tax revenues.

Salgado insisted Tuesday that Spain would reach the deficit target and ruled out more austerity measures, arguing they would damaging economic growth.

"What is most important is meeting our objectives and timelines," she said during questioning by a parliamentary committee.

The government aims to trim the public deficit from 11.1 percent of annual output last year -- the highest in the eurozone after Greece and Ireland -- to 6.0 percent in 2011 and three percent, the EU limit, in 2013.

But the European Commission predicted Monday that Spain's public deficit will fall to 6.4 percent in 2011 from 9.3 percent this year.

Spain's central government deficit shrank by 47.3 percent during the first 10 months of the year to 31.26 billion euros -- but sceptics point out that the problems lie as much with the country's spendthrift regions, which enjoy a large degree of autonomy from Madrid.

© 2010 AFP

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