EU gives Spain more time on deficit, sets bank aid

SLIPPAGE

Spanish and Italian borrowing costs continued to rise on Monday, with Spain's 10-year bond topping the critical 7 percent level.

Spanish Economy Minister Luis de Guindos spelled out to the euro zone ministers his government's plan for a package of up to 30 billion euros over several years through spending cuts and tax hikes that are due to be announced this Wednesday.

A source close to the Spanish government said 10 billion euros of cuts would come this year and that the measures would include a hike in VAT sales tax, reduced social security payments, reduced unemployment benefits and changes to pensions calculations.

The European Commission proposed in return easing Madrid's deficit goal for this year to 6.3 percent of economic output, 4.5% for 2013 and 2.8% for 2014.

European Economic and Monetary Affairs Commissioner Olli Rehn said Spain was expected to take additional savings measures very soon to ensure it meets its new targets.

The new targets may still prove hard to reach, according to a draft recommendation from European partners, loosening Spain's goals and demanding the country be subjected to three-monthly checks.

The figures highlighted Spain's dramatic fiscal slippage due to a worsening recession. Madrid was originally meant to cut its budget shortfall to 4.4% this year. Prime Minister Mariano Rajoy unilaterally changed the target to 5.8% in March before eventually accepting an agreed goal of 5.3%.

De Guindos said he was satisfied with the draft memorandum of understanding on the bank rescue, under which Spain will create a single bad bank to house toxic assets from its banking sector.

Spain and Italy continued to press for European action to put a cap on their borrowing costs.

"At this moment the only institution that has enough money to act is the ECB," Spanish Foreign Minister Jose Manuel Garcia-Margallo said at a conference.

But ECB President Draghi told EU lawmakers the key to restoring market confidence was for countries in difficulty to fully implement promised structural reforms and stick to programmes agreed with Brussels and international lenders, even if they caused "social tensions".

He left the door open to a possible further cut in interest rates after last week's 25 basis point cut to 0.75% but voiced concern that the ECB was being expected to act "in areas which don't seem to have a connection with monetary policy's traditional remit".

The euro zone ministers also had a first discussion with new Greek Finance Minister Yannis Stournaras but made no decision on any change in Athens' draconian austerity programme, which is off track following June 17 elections.

Juncker said arrangements would be made to ensure a Greek debt repayment due in August did not plunge the country into bankruptcy.

"We will find solutions for August. There's no reason to worry about August," he said without elaborating.