Brussels Eurozone finance ministers were to sign off on a second bailout for Greece Monday and shift their focus to Spain, whose government looks set to violate newly agreed European Union (EU) budget rules by missing its deficit target again this year.
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 (Dh481.67 billion) from its debt.
The swap paves the way for Eurozone ministers to give the final go-ahead to a €130 billion 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.
"Spain will be subject to serious discussion today [Monday], both because of the method and the substance of their announcement," said one Eurozone official involved in preparing for the ministers' discussions.
Spain, the Eurozone's fourth biggest economy, was quick to impose austerity measures to protect itself from the euro debt crisis. It planned to cut its budget shortfall to 6 per cent of gross domestic product (GDP) in 2011, but reported an 8.5 per cent shortfall instead.
In 2012, it was to cut the deficit to 4.4 per cent, according to a path agreed with EU finance ministers.
But with unemployment at 23 per cent and rising, Spain's new government announced this month that it would aim only for a cut to 5.8 per cent, while still maintaining a 2013 goal of 3.0 per cent.
"They will have to be questioned, I think there are no real reasons for missing the target this year," said a second euro zone official involved in the preparations.
The European Commission expects Spain's economy to contract 1 per cent this year after growth of 0.7 per cent in 2011, a sharp downward revision from the last forecast for 0.7 per cent growth.
"The worse deficit performance in 2011 is not due to worse growth, but to lax fiscal policy," a third euro zone official said. "And catching up in 2012 is then hampered by the poor expected growth, so solutions are not easy."
Spanish Prime Minister Mariano Rajoy said in a speech yesterday that Madrid wanted to honour the target of a 3 per cent deficit next year and has emphasised that while targets are being missed it is still trimming the structural deficit.
"Spain wants to fulfil its European commitments, which we have taken voluntarily and thus our actions will be in line with the recommendations to Spain from the council [of EU ministers] in 2009 and from the Commission," Rajoy said.
"We will talk in the next days, in April and May, with the Commission and the Council and our objective is to comply and reach in 2013 a deficit of 3 per cent of GDP," he said.
Eurozone officials are worried that allowing Spain to soften this year's target would create a dangerous precedent and undermine the credibility of the EU's stricter budget rules.
Belgium said at the weekend it was sticking to its deficit goals and came up with nearly €2 billion 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.