BRUSSELS (MNI) – It is too early to assess the impact that Madrid’s
aid to its banking sector will have on the government’s deficit, a
spokesman for the European Commission said on Monday.

Any losses incurred on the banks will not automatically increase
the deficit in a 1-to-1 ratio, he said.

Tbe Spanish government said over the weekend that it would miss EU
deficit targets after revising its calculation of fiscal red ink for
2011 and 2012 to take into account the capital injections it has made
into struggling banks.

On Friday, Spain published the results of an independent auditor’s
evaluation of Spanish banking sector capital needs, based on a “stressed
scenario” in which economic and financial conditions are far worse than
expected. The report found that seven banks out of fourteen banks tested
would need additional capital of an aggregate E59.3 billion.

Responding to Madrid’s revision of its deficit figures, a
Commission spokesman said, “it is too early to say what the impact on
the deficit of Spain will be.” Any losses incurred by Spain’s bank
restructuring agency, known as FROB, would “not automatically translate
into debt 1:1″, he said.

The EU’s statistics agency, Eurostat, is currently examining the
new figures, and the methodology underpinning them, and it will comment
on them October 22, when the agency publishes fiscal figures for all EU
countries.

Olli Rehn, the EU’s Commissioner for Economic and Monetary Affairs,
is in Madrid Monday to discuss the deficit figures, Spain’s 2013 budget,
and the Spanish banking system with Prime Minister Mariano Rajoy,
Minister for the Economy Luis de Guindos, and Bank of Spain Governor
Luis Linde.

In releasing details of its 2013 budget plan on Saturday, the
Spanish government estimated that national support for the country’s
troubled banks will increase the budget deficit to around 7.4% of GDP
this year, above the target of 6.3% of GDP for 2012 it has promised its
EU partners.

The government also raised its estimate of last year’s budget
deficit to 9.44% of GDP from 8.96% of GDP, to take into account the
measures to help its banks.

Madrid said that if the effect of capital provided to banks were
excluded, it would meet its EU deficit commitment.

Eurozone governments are currently arguing about whether aid they
have promised Spain to help recapitalise its banks should be taken off
Madrid’s books and transferred to the European Stability Mechanism
rescue fund, once the European Central Bank takes over supervision of
banks in the Eurozone.

Leaders of the currency bloc agreed over the summer to allow the
ESM to recapitalise struggling banks directly, in order to avoid further
burdening struggling governments. But recently, Germany, Finland, and
the Netherlands said they want to limit direct recapitalisations to
future situations rather than making them retroactive.

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