The plan would mean Spain would still have to embark on a bruising austerity program over the next two years that would cut nearly 6% of gross domestic product off its deficit.
The program would be particularly challenging given Spain’s contracting economy and 23% unemployment rate, Europe’s highest.
The dispute over Spain’s deficit marks the most important test of new rules designed to give European Union authorities more control over national budgets.
Euro zone finance ministers pressed a plan on Spain that would allow the government some leeway on its budget gap for this year but would keep a tough deficit target for 2013.
The rules, passed after more than a year of painstaking talks, are seen as a crucial piece of Europe’s response to the debt crisis, which saw Greece forced to seek a bailout after years of running deficits that exceeded the bloc’s limits.
BRUSSELS (Reuters) – The euro zone is putting the finishing touches to a second bailout deal for Greece for finance ministers’ approval on Monday, with the focus on how Greece can prioritize debt repayment and ways to ensure Athens implements agreed reforms.
EU officials and other euro zone governments are wary of allowing Spain similar wiggle room after its deficit last year strayed well above previously agreed targets.
NEW YORK (Dow Jones)–US stocks traded flat ahead of a meeting between euro zone finance ministers, and after trade data from China raised concern about growth in the world’s second largest economy.
The International Monetary Fund will finalize its contribution later in the week.
Other governments have said they won’t give more money to the IMF without a pledge from the euro zone to boost its bailout capacity.
Should it be just the euro zone giving more or should the burden be shared.
The euro zone has already promised to lend 150 billion to the IMF in the hopes other nations also will contribute.
Officials said proposals floated by some euro zone countries to postpone talks on some or all of the package until after Greek elections expected in April, did not gain wider support.
The main option under discussion to boost the euro zone’s anticrisis “firewall” would raise a 500 billion cap on total bailout lending, officials familiar with the talks said.
That compares with a target of 120 percent established in October by euro zone leaders, officials said.
“The reinforcement of the euro area financial firewall is an indispensable element of” the crisis fighting strategy, EU Economics Commissioner Olli Rehn said after the meeting.
The euro zone’s most important crisis fighting measure has proved to be new three year loans provided by the European Central Bank to the region’s banks.
That’s where it becomes more complicated,” he said.. A third euro zone official said “Most people are of the view that undoing the voluntary PSI, very carefully negotiated between Greece and the private sector investors, would be too risky.
Without a go ahead from the euro zone finance ministers, Greece cannot formally launch a debt restructuring offer to private investors.
Greece averted the immediate threat of an uncontrolled default on Friday, winning strong acceptance from its private creditors for a bond swap deal which will eat into its mountainous public debt and clear the way for a new bailout.
But the technical approval for the deal will come on Wednesday during a conference call of euro zone finance ministry officials.
The dispute with Spain marks the new EU system’s first confrontation with the perils of attempting sharp budget cuts during a recession.
Greece’s economy is estimated to have shrunk by about 15 percent since 2008, when it plunged into its deepest post war recession, dragged down by tax hikes and wage and investment cuts meant to put public finances back on track.
The Spanish government, saddled with a stagnant economy and the bloc’s highest unemployment rate, this month said its 2011 deficit was much wider than forecast and that the 2012 deficit wouldn’t meet a previously agreed target.
Inflaming tensions with the EU, new Spanish Prime Minister Mariano Rajoy unilaterally declared a new target for this year of 5.8% of gross domestic product, not even close to the old target of 4.4%.
That angered officials in Brussels and in other euro zone governments, who are used to negotiating budget targets in behind the scenes talks.
All but two of the EU’s 27 leaderssigned up to a ‘fiscal compact’ on Friday that commits euro zonecountries to balancing their budgets over the medium term.
Officials said Spain deserved these concessions relating to its old targets because its economy has weakened significantly since the targets were set last year and because the government has passed significant economic overhauls sought by EU authorities.
“Spain has made significant progress,” said German Finance Minister Wolfgang Schuble on his way into the meeting Monday.
Greek Finance Minister Venizelos is set to become the new leader of the Socialist party as the country heads to the polls next month after completing a debt restructuring.
“This is acknowledged by financial markets. The experience of the past few weeks and months shows that we are on the right path,” he said.
Bolstering Spain’s case is the fact that a number of other governments are having trouble meeting their deficit targets, most notably the Netherlands, one of the bloc’s enforcers of budget austerity during the crisis.
BRUSSELSEuro zone finance ministers on Monday pressed a budget plan on Spainregarded as a key test of ambitious new rules for the currency blocthat would allow the government some leeway on its budget deficit for this year but would keep a tough deficit target for 2013.
The main forecasting agency of the Dutch government said this month that the Dutch deficit will be 4.5% of GDP both this year and next without further deficit cuts.
Claire Cain is a business journalist based in Brisbane, Australia. Claire has a passion for financial markets and breaking news stories and loves writing about business news, stock market, and economic opinions that matters most to its audience. Claire spends a lot of time discovering and researching latest financial markets and industry news stories in order to make sure the latest and greatest stories are brought to you first on BigBoardNews.com.