MercoPress. South Atlantic News Agency

Spain feeling Irish contagion: extra yield on bonds hits Euro-area high

Jose Manuel Campa, deputy Finance Minister

Spain said it doesn’t need to adopt further austerity measures to stem a surge in borrowing costs as the central government’s budget gap narrowed by almost half.

The best thing “to generate credibility in the Spanish economy is to execute the measures we have announced at the time and in the way they were announced, and that implies not taking additional measures” Jose Manuel Campa, deputy finance minister for the economy, told reporters in Madrid Tuesday.

The extra yield on Spanish debt compared with German equivalents hit a Euro-era high Tuesday as contagion from Ireland’s fiscal crisis swept through the southern Euro area. The Spanish government is implementing the deepest austerity measures in at least three decades, including public-wage cuts and tax increases, as it seeks to reduce the region’s third- largest budget deficit by half in two years.

Spain’s central government budget deficit fell to 2.96% of GDP in the first 10 months from 5.63% a year earlier as tax revenue rose 10.9%, the Finance Ministry said in a statement in Madrid. The overall shortfall, which includes the regions’ balances, is also set to meet the government’s goal this year, Carlos Ocaña, deputy finance minister for budget issues, told Senate lawmakers.

The extra yield investors demand to hold Spanish bonds rather than German equivalents surged to 233.8 basis points, up from 209 basis points Monday. That beat the previous Euro-era intraday high of 232.6 reached on June 17, when contagion from Greece’s fiscal crisis prompted doubts about Spain’s ability to refinance debt and support its banks.

“We have to convince people that we’re going to do exactly what we said we were going to do,” Bank of Spain Governor Miguel Angel Fernandez Ordoñez told reporters in Madrid after appearing before a Senate committee Tuesday. Spain’s deficit- reduction effort is going “very well,” he said.

Spain is reducing infrastructure spending, freezing pensions next year and raising levies including a 2 percentage- point increase in value-added tax. It plans to overhaul the pension system and push through additional changes to wage- bargaining and employment rules to complement a new labor law.

Spain’s overall budget deficit, which was 11.1% of GDP last year, also includes the regional administrations’ shortfall and the balance of the social-security system, which had a surplus of 0.96% of GDP in the first 10 months, the Labour Ministry said Tuesday.

The government plans to cut the shortfall to 9.3% this year and 6% next year, and Campa said he had “full confidence” in the government’s ability to reach those targets.