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ECB calls for more Spain austerity

Source: Reuters - Fri 13th Aug 2010

Spain will need to make extra budget cuts in 2011 and must not be over-optimistic about economic growth, European Central Bank Executive Board member Jose Manuel Gonzalez-Paramo was quoted on Thursday as saying.

"It is accepted by everyone, even the government, that in 2011 and in later years additional budgetary measures will be necessary" Gonzalez-Paramo said in the second part of an interview published on Thursday by agency Europa Press.

Spain has announced austerity measures worth 65 billion euros in an attempt to cut its budget deficit to 3 percent of gross domestic product in 2013 from 11.2 percent in 2009, and is committed to taking further measures if needed.

Prime Minister Jose Luis Rodriguez Zapatero said this week he hoped next year to revive some of the infrastructure projects mothballed under the austerity drive should finances permit.

Analysts said any such spending would have to be paltry at best given the government is only just starting to convince financial markets it can stabilise its finances.

Economy Secretary Jose Manuel Campa said on Thursday that the debt-reduction drive was paramount and pledged Spain would take additional measures to ensure it meets its target of cutting its public deficit to 6 percent in 2011 should forecasts not be met.

"The objective of 6 percent for the deficit in 2011 is an unconditional objective. If forecasts were not met in any way then we would take additional measures to assure the 6 percent objective was met" he said.

The key spread between Spanish ten-year bonds and euro zone benchmark bonds has fallen from a peak of over 250 basis points hit in July to around 159 bps as of Thursday, but could shoot higher if Spain fails to convince it was meeting its deficit objectives.


Many analysts doubt Spain can meet the growth forecasts that underpin that plan and Gonzalez-Paramo came out against a rise in taxes to reduce the budget deficit, suggesting that could hurt an already unsteady recovery in growth.

He said investors must see a continued effort by Spain to reduce its debt and carry on its reforms of financial and labour markets even if financial markets have stabilised in recent weeks and debt auctions had gone well.

Indeed, he said reforms in weaker euro zone countries were necessary so they were better prepared for an eventual rise in interest rates from the ECB.

Gonzalez-Paramo also urged the government not to be so optimistic about its growth forecasts, which currently show Spain growing by 1.3 percent in 2011 and 2.5 percent in 2012.

"In moments of uncertainty like now it is not advisable to be over optimistic as it increases the risk of negative shocks that can harm confidence in economic policy" he said.

Yet Campa said that so far the government's forecasts for growth and inflation this year were largely correct. The government forecasts the economy to grow in each quarter this year after emerging from an 18-month long recession at the start of the year.

In the first part of the interview released on Monday Gonzalez-Paramo welcomed the results of European bank stress tests, and said Spanish banks must recapitalise in order to get credit flowing to the economy again.

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