Eurozone finance ministers grilled Spain on Monday over its budget deficit, which is set to break stricter new EU rules this year, stressing that Madrid must get back on target in 2013.
Greece, the bloc's original problem debtor, swapped its privately held bonds at the weekend for new, longer maturity paper with less than half the nominal value, slashing more than 100 billion euros ($130 billion) from its debt.
The swap paves the way for eurozone ministers to give the final go-ahead to a 130-billion-euro package to finance Athens until 2014, after they decided on Friday that Greece — its economy shrunk by repeated austerity measures — had met all their conditions.
But as Greece's financial problems have lost some urgency, Spain has raised a new challenge. After announcing the previous government had missed its 2011 budget deficit target by a significant margin, the new administration added it would not meet the EU-agreed deficit goal for this year either.
However, eurozone ministers meeting in Brussels focused on the size of Spain's deficit in 2013 and ensuring that it is below the EU ceiling of three percent of annual economic output, rather than the more controversial shortfall in 2012.
"We expect Spain will achieve its budget goals in 2013 and that it wants to achieve them," the chairman of eurozone finance ministers, Jean-Claude Juncker, told reporters.
Spain was supposed to cut its deficit to 4.4 percent of gross domestic product this year, but said it would only aim for 5.8 percent as it heads into recession. It also announced this month that its 2011 deficit was 8.5 percent, far above a 6.0 percent goal.
Madrid says it will still bring the deficit to below the EU ceiling of 3 percent of GDP next year, in line with the agreed final deadline, but argues that the higher starting point and slower economic growth should be considered.
"Spain's position is that two things have changed. The first: last year there was a deviation of 2.5 percent in the public deficit and the second: that the circumstances in terms of economic growth have changed significantly," Spanish Economy Minister Luis de Guindos said.
"Spain's commitment to the fiscal rules is absolute."
The European Commission expects Spain's economy to contract 1 percent this year after growth of 0.7 percent in 2011, a sharp downward revision from the last forecast for 0.7 percent growth.
Greece's crisis eased at least in the short term when it swapped its privately held bonds at the weekend for new, longer maturity paper with less than half the nominal value, slashing more than 100 billion euros ($130 billion) from its debt.
But the eurozone is keen for Spain, a far bigger economy which has so far avoided the need for a Greek-style bailout, to cut its deficit to show financial markets that it is serious about putting its public finances in order.
Bringing the shortfall back towards target should also ease concerns that more eurozone countries might be forced to ask for emergency eurozone financing.
German Finance Minister Wolfgang Schaeuble, who met De Guindos for talks before the wider discussions in a sign of Berlin's concern, praised Madrid's efforts so far.
"Spain has made great progress. Financial markets also see it that way, but of course we're all still on a tough path but the experiences and developments of the past weeks and months show we are on the right path and we're all determined to continue this path successfully," Schaeuble said.
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Several other eurozone countries have committed themselves to meeting budget targets.
Belgium said at the weekend it was sticking to its deficit goals and came up with nearly 2 billion euros of extra spending cuts to make the target — a move that could add to pressure on Spain to stick to its agreed plan. Portugal and the Netherlands are also fixed on meeting their targets.
A stricter EU Stability and Growth Pact, which came into force in December, envisages fines for eurozone countries like Spain which are already running deficits above the 3 percent of GDP ceiling and missing their deficit reduction targets.
It will be difficult for Madrid's ministers to explain why Spain should get gentler treatment than other member states.
On the other hand, forcing more austerity on a country already in recession could be difficult to justify economically and Spain insists it will meet the ultimate target of bringing the deficit down to 3 percent in 2013.
Yet Greece was asked to impose additional austerity despite a deep recession in order to receive a second bailout.
"Spain has to make an effort," Austrian Finance Minister Maria Fekter said.
"We've got to be tough in the first round of monitoring so that everyone knows we're serious ... Everyone has to stick to (the agreed budget consolidation)," she said.
But she too focused on the 2013 deficit rather than this year. "We'll have to draft a plan with Spain to prevent an excessive deficit 2013," she said.
After two years when the EU has preached budget pain as the only cure for the excessive spending that fuelled the sovereign debt crisis, showing leniency to Spain would be tantamount to waving a red flag in front of skeptical financial markets.
The ministers will discuss whether to allow their temporary and permanent bailout funds, the EFSF and ESM respectively, to run alongside each other for a year from July, with a maximum joint capacity of around 750 billion euros.
But a decision on this is likely to be made only at another meeting at the end of the month, Juncker said.
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