UPDATE 2-Spain may get nod to ease pace of fiscal cuts

* De Guindos denies Spain's forecasts are too optimistic

* IMF sees Spain's 2013 deficit higher than EU target

* Euro zone official cites concerns about Spain's deficitgoals

(Recasts; adds quotes, details)

By Robin Emmott

LUXEMBOURG, Oct 9 (Reuters) - The euro zone believes Spain'sbudget cuts should take account of its recession, its economyminister said, as regional policymakers debated whether to letthe country slacken the pace of its austerity drive.

The International Monetary Fund said late on Monday thatSpain will miss the 2012 and 2013 deficit targets that it agreedwith the European Union as the economy will contract far morenext year than the country has forecast.

A senior euro zone official told Reuters that, given thegrowth outlook, there were concerns about Madrid's ability tomeet its fiscal goals.

Those targets are seen as crucial to winning back investorconfidence and avoiding being shut out of financial markets thatare increasingly betting the country will need to tap some sortof emergency funding programme.

Spain's new central bank head, who also said the governmenthad used overly rosy GDP targets as the basis for its proposed2013 budget, has taken the opposite tack by recommending evendeeper austerity.

Speaking at an EU finance ministers' meeting in Luxembourg,Luis de Guindos brushed off those calls, saying the economicforecasts were not excessively optimistic, and that hiscounterparts in the euro zone had "absolutely not" pressed Spainfor more cuts.

"There was a positive evaluation (by ministers of Spain's2013 budget), of Spain's economic policy and the need to carryout a fiscal adjustment that is sensitive to the economicsituation in the country," the minister told reporters.

At a time of escalating anti-austerity protests in Madrid,the Washington-based IMF said that the country's public deficitwould reach 7 percent of GDP in 2012 and 5.7 percent in 2013.

That compares with European Union-agreed targets of 6.3percent this year and 4.5 percent next.


A worsening outlook for Spain will add fuel to a debateabout whether a German-led drive to cut deficits at a time ofrecession is the right approach to tackling the debt crisis, orif governments should give themselves more time to reduce theirswollen debts and deficits.

The euro zone has already eased fiscal targets for Spainonce this year, and the IMF has advised Britain, which is partof the EU but outside the euro zone, to scale back its fiscaltightening plans if growth does not pick up by early next year.

"I greatly respect the IMF forecasts ...but they are notwritten in stone," de Guindos said.

"Logically, we are working on the basis that such negativeforecasts are not met."

The Spanish government has based its budget plan for nextyear on a recession of 0.5 percent.

The IMF, meanwhile, forecast the economy - crippled by aburst property bubble and the European Union's highestunemployment rate - would shrink 1.3 percent in 2013 and 1.5percent in 2012.

The European Union's top economics official Olli Rehn, whopolices Europe's debt- and deficit-cutting efforts, acknowledgedthat the economic downturn had made life difficult for countriesin the Mediterranean, but urged them to stick to reforms.

"We know that we are currently in a mild recession inEurope," said Rehn, the EU's Economic and Monetary AffairsCommissioner. "But on the condition that the euro zone ...takesthe necessary decisions in the coming period, then we willreturn more quickly to sustainable growth."

The European Commission releases its economic forecasts onNov. 7.


Spain's newly-appointed Central Bank Governor Luis MariaLinde warned last week that Madrid's proposed 2013 budget wasbased on rosy forecasts. Linde said the government, which hasalready hiked taxes and cut tens of billions of euros in costs,should consider further steps this year to meet next year'sdeficit target.

The IMF also said that Spain's debt will jump to more than90 percent of gross domestic product in 2013 as the countryrecapitalises its banking sector , but de Guindosagain played down the forecasts.

"More than the projection, which is important, is to see howwe are closing the Spanish macroeconomic imbalances," he said.

Investors say some kind of aid package is increasinglylikely for Spain, which has also applied for a euro zone bankrescue, as the prolonged recession complicates efforts to cutgovernment spending.

De Guindos declined to be drawn on whether Madrid would askfor a precautionary credit line from the euro zone.

"At this moment, the Spanish government will continue withreforms, continue with cutting the public deficit and after thatdissipate all the doubts that exist about the future of the eurozone," he told reporters.

(Additional reporting by Luke Baker; Editing by JohnStonestreet)

((robin.emmott@thomsonreuters.com)(+32 2 287 6835)(ReutersMessaging: robin.emmott.thomsonreuters.com@reuters.net))