EU hints at further deficit flexibility for Spain

(BRUSSELS) - The European Commission hinted Monday that it could give Spain further leeway to meet budgetary deficit objectives given a deteriorating economy and troubled banking system.

"Spain has made commitments to its European partners on objectives in terms of budgetary consolidation" and "these are parameters that Spain must respect," EU economy commissioner Olli Rehn's spokesman told a news conference.

"That said, an economic analysis must be done by the Commission... which takes into account the economic environment within which the country is evolving," he underlined.

The European Union Stability and Growth Pact, which sets limits for public deficits, contains a clause obliging such an assessment.

"The pact has to be applied intelligently," said a senior EU official speaking on anonymity, days after Rehn said the pact is not "stupid."

Rehn underlined a core guideline that "fiscal consolidation, while necessary, is done in a growth-friendly and differentiated way," stressing that the "structural sustainability of public finances over the medium term" may be determined by countries' individual circumstances.

The spokesman, Amadeu Altafaj, said the Commission would have a clearer idea after the publication planned for May 11 of new growth and deficit projections for European countries.

Madrid has already been given leeway by eurozone partners to reduce its deficit this year to 5.3 percent of gross domestic product -- as against the 4.4 percent of GDP initially decided, from the 8.5 percent logged last year.

But it still has to hit the target of 3.0 percent next year -- the notional EU limit flouted by most since the financial crisis -- and many economists already forecast Spain to fail as it struggles under deep recession, sky-high unemployment, and a rake of bad debt slewing around its banks.

The Spanish economy shrank by 0.3 percent in the first three months of 2012 after a similar contraction in the previous quarter.

Italian Prime Minister Mario Monti told a recent employers' conference that infrastructure or other investment designed to unlock growth further down the line could be accounted for outside normal deficit rules.

France argued unsuccessfully for just such an approach when drawing up a reform of the pact in 2003, and a senior Commission official indicated sympathy for this approach is growing given the current economic predicament in many eurozone states.

The Spanish government said on Monday it will reluctantly swoop in with public money this week to clean up bad loans at its largest group of savings banks, Bankia.

The leading daily El Pais estimated Bankia would need 5-10 billion euros ($6.5-13 billion) to repair its balance sheet.

The Bank of Spain said doubtful loans in February amounted to 143.8 billion euros.