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Madrid - Prime Minister Jose Luis Rodriguez Zapatero said on Tuesday that Spain had beaten its deficit-cutting target for 2010 and would meet this year's goal too, addressing a deep concern on markets.
Investors are demanding ever higher interest rates for buying Spanish debt because of concerns about the size of Spain's annual deficits and the country's heavy exposure to bond markets.
The big fear is that if debt market rates go too high, Spain could be forced to seek an international rescue - a crisis with global implications that would dwarf the Irish and Greek bailouts.
Seeking to calm those fears, Zapatero's Socialist government has promised to lower the public deficit from 11.1% of output in 2009 to 9.3% in 2010, and 6% in 2011.
It has vowed further to reduce the deficit to below the 3% European Union limit by 2013.
"Of course we will meet the deficit target of 6% in 2011, just as we set the goal of reducing the deficit in 2010 to 9.3% and today I can say that we are going to be somewhat better than the objective we set," the prime minister said in an interview with Onda Cero radio.
The prime minister said he was convinced that Spain's semi-autonomous regions, which have racked up large deficits, would comply with their goals for the year ahead.
An economic and financial rescue for Spain would be far bigger than anything seen to date in Europe: the size of its economy is twice that of Greece, Ireland and Portugal combined.
To reduce the deficit, Zapatero's Socialist government has pushed through unpopular austerity measures, despite stagnant growth and an unemployment rate of around 20%, the highest in the European Union.
The measures include higher sales taxes, a freeze on old age pensions and an average cut to public workers' wages of 5%.
Last month parliament narrowly approved the government's austerity measures for 2011 which cut expenditure for this year by 7.9% to €122bn.
Spain has also announced plans to sell big stakes in the national lottery and the country's main airport operator.
The government has repeatedly stressed that the accumulated public debt is below the European Union limit of 60% of annual output, or gross domestic product. It rose to 57.7% of GDP at the end of September from 53.2% at the end of 2009.
But Spain's central and regional governments and its banks need to raise about €290bn in gross debt on the markets in 2011, including rolling over existing debt, raising their exposure to "funding stress", Moody's Investors Service said last month.
If the 10-year interest rate on Spanish debt were to exceed 6% or 6.5%, Spain would be unable to stabilise its public debt ratio in the future, Patrick Artus, analyst with French financial services group Natixis, said in a report in December.
At the last 10-year bond sale on December 16, Spain's government paid a return of 5.446%.
Tullia Bucco, analyst at Unicredit Bank Milan, said in a December report that markets also were concerned about Spanish banks' exposure to the declining property market and their holdings of government debt.
But "the fault line in this vicious circle is that the Spanish government is solvent in spite of a sizeable debt deterioration of both its structural primary balance and growth outlook in the aftermath of the financial crisis."
Moreover, Bucco said banks' solvency positions had improved after a wave of mergers promoted by the Bank of Spain - there are now 17 savings banks or groups of savings banks instead of 45.
The situation was therefore manageable, it said, especially taking into account that the Spanish bank recapitalisation fund amounted to $90bn.
