MADRID: Spain announced Friday it will slash a government spending cap by 3.8 percent in 2012 as it fights to retain the trust of markets rocked by Greece's sovereign debt crisis.
Spain's high public deficits, coupled with weak economic growth, high unemployment and troubled banks have prompted fears of a debt crunch in the heart of the 17-nation euro currency union.
Madrid says it should not be compared to Greece, Ireland and Portugal, all hit by debt crises that forced them into the arms of the European Union and International Monetary Fund.
Finance Minister Elena Salgado said the central government's 2012 spending ceiling will be cut by 3.8 percent from this year, a smaller margin than the 7.0-percent cut imposed in 2011.
The 2012 expenditure cap will be 117.35 billion euros ($167 billion), down 4.7 billion euros from 2011, she told a news conference after a weekly cabinet meeting.
Spain's public deficit blew out to the equivalent of 11.1 percent of gross domestic product, or total economic output, in 2009.
The government managed to narrow the deficit to 9.24 percent of GDP in 2010 and aims to lower it further to 6.0 percent in 2011, 4.0 percent in 2012, 3.0 percent in 2011 and 2.1 percent in 2014.
But the austerity measures and high jobless rate have brought tens of thousands of "indignant" protesters into the streets.
And analysts still fear Spain's debt-laden, semi-autonomous regions will disrupt plans to lower the overall deficit.
Moody Investors Service warned in a report this month Spain's government would find it "very difficult" to meet deficit-cutting targets because it could not curb wayward regions such as Catalonia.
Most likely, Moody's said, the central government would try to beat its own budget-reduction targets this year to compensate. But this was only a short-term solution to a structural problem, the agency argued.
Market fears are meanwhile pushing up the costs for Spain to raise money on the debt markets.
Investors demanded a "risk premium" -- the extra interest payment when compared to safer-bet German bonds -- of 2.78 percentage points on Spanish 10-year bonds Friday afternoon.
That was not far from a record risk premium of 2.83 percentage points struck in November last year.
The IMF warned in a report Tuesday that the biggest risk to the Spanish deficit-cutting target would be regional governments failing to stick to deficit targets imposed by Madrid.
Madrid would likely have to take "additional measures" to meet its medium-term targets of cutting deficits further, the IMF said.
In March, Salgado said half of Spain's 17 regional governments, including Catalonia with an economy roughly the size of Portugal's, had missed their deficit limits significantly.
Copyright AFP (Agence France-Presse), 2011
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