Spain on road to salvation: Germany's Schauble

Reuters News
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Posted: Jul 08, 2012 6:30 AM
Spain on road to salvation: Germany's Schauble

MADRID (Reuters) - Spain is on the right path to overcome recession and regain investor confidence, and its public accounts can handle the extra weight of European aid designated for banks, the German Finance Minister said in an interview published on Sunday.

While the country's troubled financial sector cannot draw directly from European aid mechanisms until next year - after the formation of a unified banking supervisor - the additional debt load was manageable, Wolfgang Schauble said.

"To talk of what will happen when the future banking supervisor is functioning is to build castles in the sky. Right now we must work with what we have," Schauble told Spanish newspaper El Pais.

"The fundamental figures and the intention to reduce the deficit shows that we should not exaggerate (the cost of the bailout on public accounts). Spain is on the right path."

Spain's government has applied for up to 100 billion euros ($123.07 billion) from Europe to recapitalize its weaker banks, hit by a burst property bubble, which would add around 10 percentage points to the country's debt levels if taken in full.

Madrid expects Spain's debt ratio as a percentage of gross domestic product to be around 80 percent - excluding the bank bailout - by the year-end, in line with the European average.

Prime Minister Mariano Rajoy has warned Spain is in danger of losing access to international debt markets as investor nerves over the state of the economy and indecision by European leaders push benchmark bond yields to euro-era highs.

The yield on Spain's 10-year bono rose above 7 percent on secondary markets on Friday, a level considered difficult to sustain in the medium term.

Rajoy is expected to announce a slew of austerity measures this week, on top of an approved savings plan worth more than 45 billion euros, to meet strict deficit goals.

Spain has said it will slash the public shortfall to 5.3 percent of GDP by the end of this year from 8.9 percent in 2011.

However, some say growing financing costs and a shrinking economy, coupled with ever deeper spending cuts and accompanying tax hikes, could mean Rajoy will eventually need to ask Brussels for a full sovereign aid package.

"Spain is doing a great deal to break the vicious circle and strengthen market confidence. It will get over the recession," Schauble said.

"Why would Spain need to apply to the aid fund? It's doing everything right. This is speculative fantasy and irresponsible."

($1 = 0.8126 euros)

(Reporting by Paul Day; Editing by David Hulmes)