Germany to allow Spain more time to cut deficit
EU paymaster Germany softened its drive for austerity across the eurozone yesterday, agreeing to allow Spain more time to cut its deficit while it battles a deepening bank crisis, capital flight and recession.
Meanwhile, Spain has said it will tap the sovereign bond markets for funds next week, although the high cost of its borrowing has reinforced analysts' predictions that the country can no longer avoid an international bailout like those of Greece, Ireland and Portugal.
Investors stampeded to safe-haven US and German government bonds amid growing worries over Spain's parlous finances and Greece's uncertain future in the single currency area.
Asked about a European Commission call to grant Spain more time to reduce its deficit, a German Finance Ministry spokesman said Berlin understood Madrid's difficulties in trying to cut its shortfall to 3pc of gross domestic product in 2013.
"We support Spain in its efforts to implement the necessary measures. But we also recognise that because of negative economic developments it will be difficult for Spain to reach its goals," spokesman Johannes Blankenheim told a news briefing.
Asked if that meant Madrid should be given more time, he replied: "I think that's what I've been saying."
Until now, Germany has taken a hard line with states missing agreed deficit targets, worried that accepting failure would weaken the commitment to consolidate and hit market confidence.
But officials close to Chancellor Angela Merkel have told Reuters that some budget goals now look unrealistic and need adjusting to reflect unexpected economic weakness.
New French President Francois Hollande, Italian Prime Minister Mario Monti, US and IMF officials have called for an easing of the austerity drive to refocus on getting the European economy moving.
Financial markets are worried about accelerating capital flight from Spain, which is resisting pressure to seek international assistance for its banks, and a repeat general election in Greece on June 17 that could lead to that country becoming the first to leave the euro area.
Spain revealed on Thursday that investors had moved a record net €66.4bn out of the country in March alone before the sudden nationalisation of ailing lender Bankia, its fourth-largest bank.
Spanish Treasury Minister Cristobal Montoro sought to soothe markets by reporting that the country's autonomous regions had balanced their budgets in the first three months and were on track to meet their 2012 deficit target of 1.5pc of GDP.
The cabinet delayed plans to adopt a new mechanism to ease their funding problems and boost their liquidity positions but Mr Montoro said he hoped to present the measure next week.
Overspending by the regions has been a big factor in the country's fiscal problems, along with mountains of debt owed to savings banks after a property bubble burst.