Spain must redouble fiscal efforts - central bank

The Bank of Spain is seen behind a sign in Madrid March 10, 2011.

MADRID (Reuters) - Spain cannot sustain its current debt financing costs for long and must redouble efforts to hit fiscal deficit targets, its central bank said, after voters gave the government's austerity programme a resounding thumbs-down.

Spain is trying to assure markets it will manage to cut its deficit back to 6 percent of gross domestic product in 2011, but investors doubt it will reach that goal due to a struggling economy and the ongoing recapitalisation of its banking system.

"The stability programme that proposes reaching a deficit of 3 percent by 2013 is an ambitious plan that was comfortably met in the first year," central bank governor Miguel Angel Fernandez Ordonez told a conference in Madrid.

"Now all the administrations -- the central government, the autonomous regions, and the local authorities -- must rigorously meet the targets fixed for this year and coming years."

Spain's ruling Socialists were reeling on Monday from stinging losses in local elections, and now have to walk a tightrope between voter anger over high unemployment and investor demands for austerity measures.

Some analysts have voiced concern the new regional leaders in Spain might uncover budget shortfalls.

Spain's public deficit was 9.2 percent of GDP in 2010, and Ordonez said that if the country managed to cut that to 6 percent this year then the outlook on the country would change significantly.

Meanwhile, Spain needed to continue its reforms, particularly to reduce the country's unemployment rate, which stood at 21.3 percent in the first quarter of the year.

"If structural changes are withdrawn to make it easier to offer job opportunities then lower unemployment rates could be achieved with lower growth rates," Ordonez said.

He said that if reforms were not made, the economy would need to grow around 2 percent on an annual basis to create jobs.

Ordonez also said the key debt risk premium, measured by the spread between Spanish and German bond yields, could not be accepted at current levels for a long time.

"We shouldn't accept having to pay a spread in the order of 200 basis points for a long time. This only increases the part of public spending paying interest, and above all creates more problems for financing to businesses."

Spanish/Bund spreads rose by 14 bps to 257 bps in early trade on Monday, their widest since January.

Ordonez said that errors by the European Union in trying to resolve the euro zone debt crisis were partly to blame for the Spain's high financing costs.

(Reporting by Nigel Davies; Editing by John Stonestreet)