Interest costs to lift Spain debt burden this year

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By CIARAN GILES, Associated Press

MADRID (AP) — Spain's debt burden will rise substantially this year because of the country's high cost of borrowing and the government's pledge to guarantee loans for local governments to pay back companies, Finance Ministry officials said Tuesday.

Budget and Expenditure secretary Marta Fernandez said Spain's debt as a percentage of GDP would spike from 68.5 percent now to 79.8 percent even after the government enacts what has been described as Spain's most stringent budget since the restoration of democracy in 1978.

The central government announced last month it would serve as guarantor for €35 billion ($46.6 billion) in loans from banks so that local governments can pay back huge outstanding debts to suppliers — everything from gardeners to pharmaceutical companies.

The 79.8 percent figure, however, will be still be considerably lower than the eurozone average of 90.4 percent for 2012, the ministry said. Nevertheless, the increase is unlikely to settle market jitters over the country's economic outlook.

Fernandez spoke alongside Finance Minister Cristobal Montoro after presenting a draft of the budget to Parliament. It is expected to be formally passed in June. The budget envisions €27 billion ($36 billion) in deficit reductions this year as the government tries to convince its partners in Europe, as well as international investors, that it has a strategy to deal with its debts and avoid a bailout like Greece, Ireland and Portugal.

Spain, with the highest unemployment rate in the 17-country eurozone at nearly 23 percent, is committed to slashing its deficit to 5.3 percent this year and down to the EU limit of 3 percent next year.

"Spain is in a critical situation," said Montoro, adding that the shortest way out of the crisis was by reducing deficit.

The ministry said interest on Spain's debt this year alone would cost some €29 billion ($38.6 billion), up 5.3 percent from last year.

Spain's borrowing costs have begun to rise again in recent days amid simmering uncertainty over the country's ability to get a grip on its finances. The interest rate for the country's key 10-year bonds hit 5.39 percent Tuesday. A month or so ago it was back below 5 percent, a rate that's seen as sustainable in the near-term.

The budget plan calls for cutting central government ministry spending by an average of nearly 17 percent and freezing civil servant wages. Overall ministry spending will be cut by€14 billion ($18.64 billion).

Indicating that it hits all areas, the ministry said the royal palace will see its budget reduced by 2 percent.

Spain is expected to enter its second recession in three years this quarter. The economy, one of Europe's most buoyant five years ago, nose-dived in 2009 as the international financial crisis coincided with the bursting of a real estate bubble that had fueled the economy for more than a decade.

The government is forecasting a 1.7 percent GDP contraction this year.

The officials spoke shortly after the Labor Ministry said that the number of people filing for unemployment benefits in Spain rose by nearly 39,000 last month to a little over 4.75 million.

It was the eighth straight monthly increase. The total filing for benefits is up nearly 10 percent on a year ago.

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