Government Could Reverse Infrastructure Spending Cuts

Spain's PM said the government may consider reversing some of the cuts to infrastructure spending, now that the country’s borrowing costs have fallen.

“We are working to be able to ease the cuts in infrastructure” Zapatero said when addressing a news conference earlier today. The plan, which could be announced within the next 2 weeks , will reinstate some of the projects that had previously been suspended.

“This will be possible if, as we understand, the current financial stability allows us some room in the 2011 budget” Zapatero said.

The extra yield investors demand to hold Spanish debt rather than German equivalents has declined by about a third since a euro-era high in June. To bring down borrowing costs, the government has enacted the deepest austerity measures in at least three decades, including a reduction in public wages and a cut in investment of almost 6 billion euros during 2010 & 2011.

The austerity measures have hurt the shares of Spanish builders, with Sacyr Vallehermoso SA’s stock down 46 % since the start of the year. Madrid-based Actividades de Construccion y Servicios SA, Spain’s largest builder, generates 74 % of sales in its home market, while smaller rival Fomento de Construcciones y Contratas SA gets around 56 % of its sales domestically.

The country’s budget deficit was the third-highest in the euro region last year at 11.2 percent of gross domestic product and the government plans to reduce it to 6 percent next year. The spread on Spanish 10-year bonds was 153 basis points today, down from a closing high of 221 basis points on June 16.