Spain Offered Time to Curb Deficit

Spain will be offered more time to hit the budget deficit targets it agreed with the EU but only if Madrid meets new conditions, including an independent audit of the restructuring plan for its troubled banks.

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The European Commission, the EU’s executive branch, has insisted on the extra conditions – which include ensuring more fiscal control over Spain’s profligate regional governments – before allowing Madrid to delay its 2013 deficit target by a year.

Spanish officials insisted on Thursday that they were not seeking any delay to the deficit targets, seen by European leaders as an essential part of the euro zone’s strategy to resolve its financial crisis. EU officials said there were some members of the Spanish government, headed by Mariano Rajoy, the prime minister, who were resisting the offer of leniency because they feared that investors would see it as evidence of creeping fiscal indiscipline. The government has pushed through 27 billion euros ($35 billion) in austerity measures.

“I do not understand the Spanish government as wanting an additional year,” said one EU official involved in the talks.

However, there were signs on Thursday that Spain would accept many of the demands, including the hiring of outside experts to verify bank stress tests, a tactic adopted by Ireland last year to convince EU officials and financial markets that they had finally drawn a line under expected real estate losses.

“To my eyes, it looks like a convincing plan of action to clean up and recap the banking sector,” said another senior EU official briefed on the plan.

Spain has said it will intervene in any of its 17 autonomous regions that fail to meet their deficit reduction targets, which have been set a limit of 1.5 percent of gross domestic product for this year. Spanish regions are due to present their budgets next week.

The Rajoy government’s announcement on Friday of a bank restructuring plan will be Spain’s fourth attempt to overhaul its financial sector after the bursting of its property bubble. On Wednesday, it announced the part-nationalization of Bankia , Spain’s third-biggest bank by assets.

As part of the government plan, officials said banks would be required to increase the amount of money they set aside against property-related loans by at least 30 billion euros. The government is also expected to establish special vehicles to house troubled assets that have been adequately provisioned.

The new provisions will take total funds set aside by Spanish banks to about 120 billion euros, or 40 percent of their 308 billion euros in total real estate assets. The Bank of Spain classified 184 billion euros as problematic at the end of last year.

Although some elements of the Spanish government are resisting any slackening of fiscal discipline, Madrid may have little choice when the European Commission announces its deficit projections for all euro zone countries on Friday.

European officials said the data will show Spain is on track to miss both its 2012 deficit target, 5.3 percent of economic output, and the 2013 target, the 3 percent maximum set by EU regulations. Without leniency, Spain could face big fines for missing the targets.

EU officials cautioned, however, that the new commission projections come before Mr Rajoy has unveiled his 2013 budget, which could put Madrid back on track.

“How Spain will approach 2012 and 2013 is more the story,” the EU official said.