Spain Bailout Seen as Not Imminent as Deficit-Cut Doubts Mount

Bloomberg: A possible bailout for Spain is not imminent, a European Union official said, as concerns grow over the country’s ability to reach its deficit-reduction targets.

There’s no guarantee that Spanish Prime Minister Mariano Rajoy will ask for aid from the EU rescue funds and that no request is pending, the aide, who asked not to be named, told reporters in Brussels today.

While European Central Bank President Mario Draghi said yesterday the ECB is ready to start buying bonds of sovereigns that qualify for aid, officials from Spain, Germany and now the EU have damped expectations of a rescue this week. Rajoy on Oct. 2 denied reports a rescue request would come this week. Economy Minister Luis de Guindos last night said no bailout was needed.

There’s “a potential slowdown in Spain’s application for a European program,” Thomas Costerg, an economist at Standard Chartered Bank in London, said yesterday by e-mail. “There is a rising fear that the 2013 budget and the stress tests may have been some sort of window dressing to get European assistance.”

Olli Rehn, the European commissioner in charge of policing budget rules, told Spanish officials their plans to reduce the shortfall to 4.5 percent of gross domestic product next year are based on excessively optimistic assumptions about economic growth, two people familiar with the issue said. Central bank governor Luis Maria Linde, who met Rehn on his Oct. 1 visit to Madrid, echoed that view in comments to lawmakers yesterday.

Spanish bonds rose for the first day in three, with the 10- year yield falling 4 basis points to 5.87 percent at 10:30 a.m. inMadrid.

‘Certainly Optimistic’

Spain’s 2013 budget assumes the economy will shrink 0.5 percent, less than the 1.3 percent median contraction predicted by 21 analysts surveyed by Bloomberg. Linde, the Bank of Spain chief, said targets were “certainly optimistic” in testimony to the parliament’s budget committee.

Weaker economic performance would widen the deficit, forecast at 6.3 percent of GDP in 2012, forcing the government to impose more austerity or plead for a looser target. Spain has been let out of its 2013 commitments before. European governments in July raised the deficit target from 3 percent.

Linde urged Rajoy to prepare additional austerity measures to ensure Spain meets the deficit obligations, which may determine whether EU officials grant financial support.

“Given the importance of achieving this, additional measures that would make it possible should be considered,” the governor said.

Planned Cuts

The 2013 budget, released Sept. 27, included the fifth set of tax increases and spending cuts since Rajoy took office in December. Public opposition has grown fiercer each time, climaxing last week with two days of protests in Madrid.

Already tapping 100 billion euros ($130 billion) in aid to overhaul its banks, Spain is considering a broader European support package to shore up the government’s finances.

The ECB’s offer of unlimited bond purchases “helped to alleviate tensions over the past few weeks,” Draghi said yesterday after the monthly meeting of the ECB’s governing council. “Now it’s really in the hands of governments.”

reporter on this story: Ben Sills in Madrid