Spain slipping on deficit increases contagion chances

Written by Bloomberg | Updated: Oct 26 2011, 09:25am hrs
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 in Paris. Our September forecast sees Spains deficit at 7% of gross domestic product this year, he said, adding that the prediction was made before the nations credit rating was cut this month.

The yield on Spains benchmark 10-year bond fell one basis point to 5.53% as of 10:34 am in Madrid after European leaders ruled out tapping the European Central Banks balance sheet to boost the regions rescue fund during a summit in Brussels over the weekend. The government has aimed for a deficit equal to 6% of GDP this year, down from 9.2% 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.