Ailing Spain set to miss EU deficit reduction targets

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The Independent Online

Spain will come nowhere near hitting its EU deficit reduction targets, either this year or next, according to the latest economic forecasts from the European Commission.

The forecasts show that Madrid's deficit will come in at 6.4 per cent of GDP in 2012, well above the 5.3 per cent target set for the centre-right government of Mariano Rajoy. The Commission also forecasts that Spain's deficit in 2013 would be 6.3 per cent, more than double its official 3 per cent official target.

The main reason is a sharp fall in Spanish growth prospects as the country sinks back into recession.

The Commission forecasts that the Spanish economy will contract by 1.8 per cent in 2012 and by a further 0.3 per cent in 2013 and that the eurozone as whole will contract this year by 0.3 per cent.

The Commission is expected to give Spain more time to hit its 3 per cent target, enshrined in the new fiscal compact, signed by European leaders in December, rather than exercising its right to levy fines and other sanctions.

But Spain is not the only nation that is set to bust its 3 per cent deficit limit in 2013. France's deficit is projected by the Commission to be 4.2 per cent next year. The new French President, Francois Hollande, has said he will hit the target, but has yet to outline how.

Spain yesterday announced plans to force its banks to set aside an extra €30bn to provision themselves against bad property loans. The banks will have to raise the money or borrow from the government at an annual rate of 10 per cent. But analysts said that the moves would not be enough to restore investor confidence.

"Spain is still playing catch-up with the markets" said Nicholas Spiro of Spiro Sovereign Strategy. "It needs a shock-and-awe-type programme to restore confidence in Spanish banks. But this would require some form of external assistance."