PARIS (MNI) – Spain risks missing its deficit targets this year and
next, and it will likely have to implement additional measures to meet
its commitment to bring the budget deficit below 3% of GDP by 2014, the
Organization for Economic Cooperation and Development said Thursday.

In its latest Economic Survey of Spain, the OECD said that Madrid’s
deficit targets were “challenging” and that the dampening impact of
weaker domestic demand on tax revenues might be underestimated.

“Additional measures are likely to be needed to meet the headline
deficit target for 2014,” the OECD said.

But like a report issued by the International Monetary Fund earlier
this week, the OECD said that further deep budget cuts should be avoided
if Spain’s growth turns out to be much weaker than expected.

The European Commission extended Spain’s deficit reduction
timetable by an extra year this summer because of the country’s ongoing
recession. Madrid has now agreed to cut its budget gap to 6.3% this
year, 4.5% in 2013 and 2.8% in 2014.

But in pledging to meet the budget goals, the Spanish government is
counting on a much shallower recession than the OECD and other
international forecasters like the IMF are projecting. The OECD
anticipates that Spain’s economy will shrink by 1.4% next year, nearly
three times the 0.5% decline that the government assumed in its 2013
budget.

“Spain is immersed in a prolonged recession,” the OECD said. “The
prospect of an immediate recovery remains remote as deleveraging of the
private sector still has a long way to go, while the feedback loop
between government finances and the banking sector remains strong.”

The OECD said that allowing the European Stability Mechanism to
recapitalize Spanish banks once a centralized EMU bank supervisory
mechanism is in place would help break that feedback loop. And it said a
decision by Spain to launch the European Central Bank’s OMT bond-buying
plan by making an official aid request would help reduce Madrid’s
borrowing costs.

The Paris-based organization praised the progress Spain has made so
far in restructuring its banking system and urged that weak banks be
recapitalized or closed as quickly as possible.

“Rapid orderly resolution of non-viable banks and recapitalisation
of viable banks with capital needs will be key,” the report said.

The OECD report comes just one day after the European Commission
approved E37 billion in aid for four of Spain’s nationalized banks,
saying that all of them would be required to slash the size of their
balance sheets and only one would survive long-term as an independent
institution.

–Paris newsroom, +33142715540; jduffy@marketnews.com

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