MADRID (Dow Jones)--Spain is beating its own deficit-reduction targets in the clearest sign to date that its reform efforts are paying off, the Spanish government said Tuesday.
According to advance data from the finance ministry, the central government's 2010 budget deficit was equal to 5.1% of gross domestic product, ahead of its 5.9%-of-GDP target, and down from 9.4% of GDP in 2009.
Finance Minister Elena Salgado said this result meant Spain would "comfortably" meet its target of an overall public sector deficit--including social security, regional and municipal administrations--of 9.3% of GDP in 2010.
The better-than-expected result was the largely the result of a 10.9% rise in 2010 tax revenue, compared with a forecast increase of 8.1%. The government last year raised its general sales tax rate by two percentage points to 18%, eliminated a tax rebate and raised capital gains taxes.
Spain, which is grappling with the collapse of a decade-long construction boom that sent its economy into a slump and punched a large hole in its budget, is aiming to bring its deficit in line with the 3%-of-GDP limit for European Union countries by 2013.
On a less positive note, the government's new plan to shore up its ailing banks was greeted with a mixed response from financial markets. On Monday it instituted a requirement for all banks to have an 8% core Tier 1 capital ratio and said it estimates they will need to raise about EUR20 billion in new capital to do this. The state's Fund for Orderly Bank Restructuring stands by to help them do so.
Salgado pointed to a sharp drop of yields at a Tuesday treasury auction of short-term debt as evidence that banking reform and deficit reduction are boosting investor confidence in Spain. "I think doubts are being dispelled," she said.
Nonetheless, equity investors responded with heavy sales of Spanish bank shares. Shares in banking heavyweights Banco Santander SA (STD) and Banco Bilbao Vizcaya Argentaria SA (BBVA) are both down over 3%. Nomura analyst Daragh Quinn said that while it was good that Spain was moving to accelerate banking sector clean-up, most private-sector analysts believe the banks need to raise more in new capital than the EUR20 billion forecast by the government.
"The headline number could initially look disappointing," Quinn said.
Source: Wall Street Journal