Guindos: Spain’s 2011 public deficit may top 8 percent

Spanish economy minister sees contraction in first quarter • Government announces spending cuts of 8.9b. euros and additional tax hikes worth about 6b. euros

MADRID (Reuters) Spain’s public deficit for 2011 may be higher than the 8 percent of GDP forecast by the new government, the economy minister said on Monday, fueling fears the country faces a prolonged period of tight budgets and economic contraction.

Spain had originally targeted a 2011 deficit of 6% of gross domestic product, but the newly elected conservatives said on Friday that the deficit would be 8%. It said it would now have to work hard to hit this year’s tough deficit-reduction goals in an economy seen tipping back into recession this quarter and announced new tax rises and spending cuts.

“We’ll need to see, but it’s possible that we have gone over the 8% mark, though [we] expect that it hasn’t done so by much,” Economy Minister Luis de Guindos said during an interview with Cadena Ser radio, his first since taking the post after the conservatives won the November election.

Friday’s announcement that the deficit would be as high as 8% of GDP has reignited market concerns about the financing needs of indebted euro zone countries and put downward pressure on the euro, which hit a decade low versus the yen on Monday.

Guindos said Spain’s economy may contract in the first quarter of 2012 after shrinking in the previous three months, in line with analyst expectations that the euro zone’s fourth-largest economy is already in recession.

Spain has been a focal point of the debt crisis as the previous Socialist government fought to deflate one of the highest public deficits in the currency bloc by introducing massive spending cuts and tax hikes.

The country’s manufacturing slump showed no sign of letting up in December, adding to expectations the battered economy will shrink in the next few quarters, a purchasing managers’ survey showed on Monday.

The government announced additional tax hikes on Friday worth an estimated 6 billion euros a year and spending cuts worth 8.9 billion euros, with which it aims to reduce the deficit by 1 percentage point in the short term.

Treasury Minister Cristobal Montoro, speaking at a separate event in Madrid on Monday, said the government would announce new economic measures on Thursday after the weekly cabinet meeting, but these would not include further spending cuts.

The premium fixed income traders demand to hold Spanish over German debt dropped by 3 basis points to around 329 bps on Monday from settlement on Friday, but trade was thin with London markets closed until Tuesday.

“The measures announced by the government don’t seem to have had an effect, for good or bad. Tomorrow will be the test, but I don’t think the market will react much. The tax hikes and cuts have been more or less discounted,” a Madridbased trader said.

Measures to balance the public accounts will be accompanied by structural reforms that will help restart the stalled economy, Guindos said.

“The government has a very aggressive reformist agenda for the next few weeks and months, in the labor market, the financial system, in the goods and services markets and competitiveness,” he said.

The austerity measures announced last week are the first of many, Deputy Prime Minister Soraya Saenz de Santamaria said. The government must find savings worth more than 35 billion euros in 2012 to meet its deficit goal of 4.4% of GDP.