Spain will struggle to meet its deficit-reduction target this year as economic growth slows, threatening further debt-crisis contagion as Europe fails to erect a fail-proof firewall.
“They will never make it,” said Ludovic Subran, chief economist at credit insurer Euler Hermes SA in Paris. “Our September forecast sees Spain’s deficit at 7 percent” of gross domestic product this year, he said, adding that the prediction was made before the nation’s credit rating was cut this month.
The yield on Spain’s benchmark 10-year bond fell one basis point to 5.53 percent as of 10:34 a.m. in Madrid after European leaders ruled out tapping the European Central Bank’s balance sheet to boost the region’s rescue fund during a summit in Brussels over the weekend. The government has aimed for a deficit equal to 6 percent of GDP this year, down from 9.2 percent in 2010. Data on the deficit for the first nine months of 2011 will be published sometime this week.
European leaders’ failure to end the debt crisis risks “a vicious circle” in which “deficit reduction weighs on growth, rendering targets unachievable and triggering more downgrades, eventually leading” to default, said Angel Laborda, chief economist at savings-bank foundation Funcas in Madrid. Policy makers must ensure that euro-area nations’ debt will be repaid even without growth, he said.
