Last year, Spain was widely praised for getting to grips with its borrowing, says Jonathan House in The Wall Street Journal. The budget deficit fell from 11% of GDP in 2009 to just over 9% last year. But now it seems Spain, like Portugal and Greece, will have to admit that its “deficit-cutting efforts have gone off track”.
Achieving the 6% of GDP deficit target set for this year, and next year’s 4.4%, is looking a stretch. The government’s growth target for 2011, 1.3%, is overly optimistic. High household and corporate debt is hampering borrowing and spending. External demand is also weak amid a regional slowdown. A return to recession looms. The other problem is “profligate regions”, as Fiona Maharg-Bravo points out on Breakingviews.com. Twelve of 17 largely autonomous regions were missing centrally set deficit targets in late June. All this implies a rise in Spanish bond yields, and hence borrowing costs. That will raise the prospect of Spain being shut out of the markets and eventually defaulting.