‘Economy will shrink by up to 1.5 percent in 2013’

Spain's economy will shrink by between 1.0 percent and 1.5 percent this year, Economy Minister Luis de Guindos said in an interview published Monday in the Wall Street Journal.

The prediction revises the government's official forecast of a 0.5 percent recession in 2013 and comes the same day as Brussels confirmed Spain posted the biggest deficit in the eurozone last year.

De Guindos told the newspaper he saw "slight" growth in Spain's economy for 2014.

Spain, the eurozone's fourth-largest economy, shrank by 1.37 percent in 2012 as it continued to feel the effects of the collapse of a decade-long property boom in 2008.

The Bank of Spain, the European Commission and the International Monetary Fund predict the Spanish economy will shrink by between 1.4 and 1.6 percent in 2013.

Prime Minister Mariano Rajoy's conservative Popular Party government will unveil a new package of reforms aimed at reviving the economy, as well as new deficit forecasts for the next few years, on Friday.

Spain posted a budget deficit equal to 10.6 percent of gross domestic product (GDP) in 2012, the highest in the eurozone, including the cost to the state of recapitalizing the country's suffering banks.

Madrid argued at the end of March that when this cost was stripped out of the calculation, the public deficit fell to 6.98 percent of GDP last year.

Spain had agreed to reduce the deficit to 4.5 percent of GDP this year and to 2.8 percent in 2014.

But it is now seeking leeway from the EU to ease its deficit target for 2013 to 6.0 percent, and to push back as far as 2016 the obligation to get back within the terms of the EU's Maastricht Treaty, under which member states are supposed to have public deficits of no more than three percent of GDP, and debt of no more than 60 percent.

This would allow Spain to soften austerity measures implemented by Rajoy's government that are blamed for triggering the recession.

De Guindos said the new reforms to be unveiled on Friday will not include any "significant" austerity measures.

"What we will do now is to establish a better balance between deficit reduction and economic growth. Investors' main concern right now is economic growth," he told the newspaper.

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Borrowing costs drop in Spanish bond bonanza

Spain's long-term borrowing costs eased on Thursday in a bond sale, authorities said, a further sign of strengthening confidence in the country as it hopes to crawl out of recession.

Borrowing costs drop in Spanish bond bonanza
The Madrid stock exchange building. Photo: Tomás Fano

The rate of return demanded by investors for the benchmark 10-year bond — a key measure of confidence in the eurozone's fourth-biggest economy — edged close to the record low level reached in 2010, the Bank of Spain said in a statement.

Investors snapped up more than €4 billion ($5.29 billion) in total, overshooting the Treasury's target of three or four billion euros, with demand for the bonds more than double the amount on offer.

The Treasury sold €2.41 billion of 10-year bonds, with the rate of return falling to 4.50 percent from 4.72 percent in the last comparable auction on July 18.

That brought the key rate closer to the record low of 4.14 percent reached in September 2010.

It also sold just under €1.6 billion worth of five-year bonds, with the rate falling to 3.48 percent from 3.56 percent in the last comparable sale on August 1.

Spain's soaring borrowing costs last year raised fears for the overall stability of the eurozone but the conservative government resisted speculation that it would seek a full euro zone bailout and financial tensions have since eased.

The pace of economic contraction eased in the second quarter of this year and the government and central bank now expect the country to return to economic growth in the current quarter.

The Madrid stock exchange rose slightly after Thursday's sale, with the IBEX-35 leading share index 0.39 percent higher in early afternoon trading.