MADRID: Spain, struggling to avoid a debt bailout, will miss key public deficit targets this year and next, the central bank warned Wednesday as it also pointed to slower-than-expected growth ahead.
The warning came as financial daily Expansion reported that a merger of four regional Spanish savings banks as part of crucial banking sector reforms, is likely to be scrapped due to a disagreement over pricing.
Spain's regional savings banks are weighed down by loans that turned sour after the collapse of a housing bubble in 2008 and are at the heart of fears the country could follow Greece and Ireland in needing an EU-IMF bailout.
In its latest economic bulletin, the Bank of Spain estimated the nation's public deficit will be equal to 6.2 percent of Gross Domestic Product this year before falling to 5.2 percent on 2012.
The government predicts the deficit will hit 6.0 percent in 2011 and 4.4 percent next year, a sharp improvement but still well above the EU 3.0 percent ceiling.
The central bank said the difference in its estimates for the public deficit was mainly due to its lower economic growth forecasts. If growth slows, governments typically have to spend more to make up the slack while raising less tax revenue, straining the public finances.
The central bank predicted the economy, Europe's fifth largest, will grow by 0.8 percent in 2011 and 1.5 percent in 2012, well below the government's forecasts of 1.3 percent growth this year and 2.5 percent in 2012.
"The Spanish economy is still in a difficult situation requiring the pursuit of ambitious and demanding policies to correct the fiscal imbalances, while pressing ahead with structural reforms conducive to growth and with the restructuring and recapitalisation of the banking system," the bank said.
The government has slashed spending and passed pension reforms in its effort to reassure markets worried that its public deficit is unsustainably high.
It has also reformed the labour market in an attempt to revive the economy and fight an unemployment rate of just over 20 percent, the highest in the industrialised world.
The Bank of Spain said the unemployment rate "may continue to rise in 2011 and will only begin to fall slightly in 2012, in the absence of additional labour market measures."
Prime Minister Jose Luis Rodriguez Zapatero announced at an EU summit in Brussels last week that Spain will introduce a bill that will force the central government to limit total spending as a percentage of GDP.
He also said his government was confident it will complete a pending reform to the nation's collective bargaining system by late April and would step up the fight against black market jobs and tax evasion.
During a debate in parliament on Wednesday, Zapatero said illegal hiring "clearly prejudices the whole of the Spanish economy."
He said companies that respect the law "find themselves faced with unfair competition" while employees who do not pay contributions "are deprived of social and labour protection".
According to the most recent figures released by the Gestha union of tax inspectors, the black economy accounted for 23.3 percent of Spain's economic output in 2009, or 244.9 billion euros ($344.7 billion).
The government has also encouraged reform of the banking sector but the report in Expansion suggests the process is poised for a setback.
The newspaper said three of the partners in the proposed Banco Base --
Cajastur, Caja Cantabria and Caja Extremadura -- would reject the terms of the merger in meetings Wednesday "unless there is a last-minute surprise."
The government has been pressing the regional banks to consolidate, reducing the number of institutions from 45 to just 14.
The Spanish economy contracted by 0.1 percent in 2010 after shrinking 3.7 percent in 2009.
Spain along with bailed out Greece and Ireland were the only eurozone economies to shrink in 2010.
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