Spain Defends Budget Plans Amid EU Warnings, Contagion Signs By Bloomberg

© Reuters.  Spain Defends Budget Plans Amid EU Warnings, Contagion Signs

© Reuters. Spain Defends Budget Plans Amid EU Warnings, Contagion Signs

(Bloomberg) — The Spanish government said it is confident its budget plan will be cleared by European authorities even after its fiscal efforts were called into question.

The European Commission said in a letter on Friday than it cannot exclude a risk of Spain deviating from the bloc’s fiscal rules, asking Madrid’s government to submit more information about its 2019 spending plans. Spain’s budget minister Maria Jesus Montero downplayed the implications of the letter as part of a normal exchange of information between Madrid and Brussels.

“The letter is completely normal, this is part of the process and we have the information at the ready,” she said. “We believe Brussels will clear our budget.”

The Spanish administration is seeking to distance itself from Italy amid signs of contagion in bond markets. Italy may become the first euro member to see its budget rejected by the Commission after it was warned Thursday that its 2019 plans represent an “unprecedented” deviation from EU rules. T

The spat between Rome and Brussels over fiscal rules has triggered a sell-off in Italian assets. Unlike Italy, Spain’s deficit is clearly on a downward path even if the pace of consolidation has slowed, a Spanish official said.

Spain’s 10-year bond yield was at 1.74 percent on Friday evening after rising as much as 10 basis points to 1.82 percent earlier in the day, a level last seen in March 2017.

The Socialist government’s projection for a deficit of 1.8 percent of GDP next year is bigger than the 1.3 percent targeted at the start of the year by the previous administration. Yet the administration will cut its structural deficit, adjusted to take the economic cycle and one-off payments into account, by 0.4 percentage points. In the letter, European authorities said the goal is below the recommendation of 0.65 percentage points set out in July.

Prime Minister Pedro Sanchez said Thursday at an EU summit in Brussels that he is confident the budget bill be cleared by the Commission. His biggest obstacle will be winning the backing of Parliament, where his minority government has 84 out of 350 seats.

(Updates with EU Commission letter from second paragraph.)

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