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Spain to unveil more austerity moves on Friday

Source: Reuters - Fri 19th Aug 2011

Spain will announce further austerity measures on Friday in a bid to fend off debt market attacks but avoid the kind of drastic cuts that could damage the ruling Socialists' chances in November's general election.

The government is expected to unveil savings of around 5 billion euros by front-loading tax payments from large businesses and cutting drug costs for regional governments with a new bill on generic medicines.

Though comparatively small, the measures could compensate for any overshooting of public deficit targets by Spain's 17 autonomous regions, a persistent market worry.

Parliament has been recalled to vote next week on the measures, which are due to be presented around 8 a.m. EDT and expected to win approval from lawmakers.

The tax change will save 2.5 billion euros in total over the course of Spain's deficit-reduction program to 2013, Economy Minister Elena Salgado told Reuters last week.

Around 2.5 billion euros more should be saved through reductions in subsidies on medicines over the course of a single year.

The measures will boost the government's chances of hitting its target to cut the deficit to 6 percent of GDP this year. The government cut the gap to 9.2% in 2010 from 11.1% in 2009.

The opposition People's Party, likely to win the elections, has dismissed the changing of tax payments, which will force large companies to pay taxes due in 2012 before the end of 2011, as an accounting trick.


Analysts say hitting this year's deficit target will be hard given economic growth that is barely hovering above zero, high debt-servicing costs and broader global growth concerns.

Spain's debt risk premium on 10-year bonds against German bunds has come down since hitting euro-era highs over 400 basis points in August, thanks largely to bond purchases by the ECB.

On Friday the spread was around 293 bps, little changed from the previous day and tracking Italian debt, which the ECB has also been buying.

The governing Socialists (PSOE) have hemorrhaged voters, suffering the effects of last year's austerity program which included public sector wage cuts. The party is lagging by as much as 14 percentage points in the polls.

For this reason, analysts expect Friday's news to be limited to measures that won't affect most voters, avoiding unpopular reforms such as tax hikes or cuts in health services, which would further damage the party's chances of winning the election.

Prime Minister Jose Luis Rodriguez Zapatero brought forward general elections by four months, hoping to take advantage of a pick-up in employment over the peak summer tourist season.

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