The bond rally that has sent Spanish borrowing costs to 10-month lows has detracted attention from the nation's growing debt pile.
Spain’s budget deficit probably exceeded 9 per cent for a fourth year in 2012 as Europe’s highest unemployment rate, a third recession in four years and the cost of bailing out its banks offset almost all of the government’s €62 billion ($83 billion) of spending cuts and tax increases.
The European Union has eased the pressure on Spain to deliver its deficit goals. EU budget enforcer Olli Rehn endorsed Spain’s efforts through the end of this year even as he forecast the shortfall will exceed the targets set, strengthening the support for Spanish securities. Investors are being drawn back to Spanish debt as the ECB pledge curbs the risk of paper yielding three times more than German bunds. The Treasury exceeded its target as borrowing costs tumbled at the first bond auction of the year last week.
Rajoy last year introduced five austerity packages he forecast would deliver €62 billion of savings in 2012 from cuts in public wages, jobs, unemployment benefits, health care and education spending. Those expectations have been dashed as Spain fell into recession, increasing unemployment costs and depressing government receipts.
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