EU to predict dire 2013 for Spain: report

The European Commission is to forecast Spain's economy will be almost as dire next year as this, a newspaper said on Tuesday, raising the pressure for a euro zone bailout and undermining government promises that 2012 will mark the low point.

Neither the Commission nor Spain's economy ministry would confirm the report in El Pais that Brussels will predict an improvement only in 2014 when it officially announces its autumn forecasts on Wednesday.

Prime Minister Mariano Rajoy said Spain would return to growth in 2014, the same year forecast by the Commission according to El Pais, which cited a draft document.

However, Madrid's growth estimates for that year are more than double that of the Commission, while its budget deficit forecasts to 2014, when it aims to meet EU demands to cut the shortfall to below 3 percent of GDP, are also more optimistic.

"In 2014, there'll be growth in Spain. The worst year will have been 2012 and next year will be better," Rajoy said in a radio interview. "All the measures we're taking are aimed at economic recovery ... it's very difficult to create jobs when you owe so much."

El Pais reported that the Commission forecast a 1.5 percent decline in Spanish gross domestic product in 2013, scarcely any better than a 1.6 percent drop this year. Next year's Commission forecast is in line with the consensus in a Reuters poll of economists taken a fortnight ago.

However, both are significantly worse than the 0.5 percent contraction expected by the Spanish government in 2013.

Spain lies at the centre of the euro zone's debt crisis due to concerns that the government cannot control its finances at a time when one in four workers has no job.

The economy slipped into its second recession since 2009 at the end of last year, with domestic demand shattered by austerity measures aimed at reducing the public deficit.

El Pais said the Commission saw a deficit of 8 percent of GDP in 2012, including the cost of recapitalizing problem banks. This would fall to 6 percent in 2013 and 5.8 percent in 2014, above Spanish forecasts of a 7.3 percent deficit this year, 4.5 percent in 2013 and 2.8 percent in 2014.

EFFECTIVE ECB ACTION?

Rajoy has so far hinted that he can hold off on applying for a financial rescue that would open the way for the ECB to buy Spanish government bonds on the secondary market.

However, he questioned not only the conditions of any aid but how much ECB action would ease Madrid's borrowing costs, which are currently more than 400 basis points above those of Germany, the euro zone benchmark.

"The problem is not just the conditions, but how much would it reduce the premium? If we end up staying around 400 and (it)doesn't drop to 200 ... well the operation doesn't really make any sense," Rajoy said.

The premium investors demand to hold Spanish over German debt stood at around 435 basis points on Tuesday, a long way below highs of over 650 bps before the ECB announced the plan.

After a bond auction on Thursday, the Treasury is likely to have met its 2012 gross target for borrowing, but Spain faces larger debt repayments in 2013 and will take on the obligations of its cash-strapped regional governments.

The Commission's draft forecasts do not include the impact of Spain's latest round of tax increases, El Pais said.

Rajoy has raised taxes and made spending cuts worth more than 6 percent of GDP to 2014, but there is growing consensus that deep austerity is self-defeating and troubled economies should be given more time to balance their accounts.

Rajoy reiterated on Tuesday that reducing the deficit was a priority for his government, though he was not planning to introduce new tax hikes which have already fuelled mass street protests and a general strike planned for November 14.

However, if the deficit strays too far from target, he may be forced to make further savings, piling on pressure on the battered economy and raising the need for external aid.

HESITATION SPREADS

Rajoy is not alone in his hesitation over the effectiveness of any rescue plan, with Italy's central bank governor Ignazio Visco saying on Monday that some other G20 countries were also voicing doubts.

Spain's conservative government, in power since the end of last year, is worried that a humiliating request for help would come with demands for more unpopular cuts.

After a year of recession, unemployment hit a record high of 25 percent in the third quarter and the manufacturing and service sectors shrank again in October, according to a survey.

Economy Minister Luis de Guindos has said he believes the economy will shrink less this year than the government forecast after better-than-expected contraction in the third quarter. (Additional reporting, writing by Paul Day; Editing by Jeremy Gaunt and David Stamp)