Spain’s Deficit May Be Even Higher: Economy Minister

Could top 8% predicted on Friday by new government

Spain got more bad news on the second day of the New Year: its level of public debt may be even higher than the 8% of GDP predicted just Friday by its new government, according to its economy minister.

Reuters reported that Economy Minister Luis de Guindos said during a Monday interview with Cadena Ser radio that the economy may continue to contract in Q1 2012, after having done so during Q4 2011. That would confirm what analysts believe—that Spain, with its high unemployment rate, is in a recession.

In the interview, his first since coming into office after the November elections, he was quoted saying, "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."

According to a purchasing managers' survey released Monday, Spain's manufacturing slump continued through December. That appears to confirm that the country's economy will continue to shrink over the next few quarters. Considering the additional austerity measures announced on Friday, and reported by AdvisorOne—a mix of tax hikes and spending cuts that will hit residents hard—there seems little chance that the Spanish economy can grow its way out of the country's debt woes.

Additional cost-cutting measures are planned as well, according to Deputy Prime Minister Soraya Saenz de Santamaria. Luis Martinez, an economist at Citi, was quoted saying of the approach, "With these measures, we're not very optimistic on the growth prospects for this year. We expect the economy to contract by more than 2%, but it all depends on financing costs. If the deficit-cutting measures change the market perception, the economic contraction could be less. If not, probably more."

Guindos also said, however, that steps being taken to balance public accounts will be supported by structural reforms intended to help restart Spain's floundering economy. He was quoted saying, "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."

A Madrid-based trader was quoted saying of the new government's agenda, "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." Trading on Monday was thin with London markets closed till Tuesday.

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