Spain's fiscal U-turn may not convince markets

By Andrew Hay

MADRID (Reuters) - Spain's fiscal austerity drive is being met with scepticism by economists, who fear it will be unable to cut spending as it struggles with potential bank bailout costs and a persistent recession.

This means the country could find borrowing increasingly expensive, despite its new-found zeal for spending controls.

Having had its sovereign credit rating downgraded once during the crisis, the government is keen to avoid further cuts that would increase debt risk premiums.

In the last month, Spain has hiked tobacco and fuel levies, flagged more tax increases in 2010 and proposed axing spending to stop its budget deficit entering double digits.

But one person with access to public accounts, who asked not to be named, told Reuters the public deficit could more than triple to 12 percent this year from 3.8 percent in 2008.

Spain entered the crisis with some of the healthiest public accounts in Europe, but must absorb the twin shocks of its deficit and a 99 billion euro bank rescue fund.

Economists fear the government could face expensive bank bailouts in 2010 as a prolonged recession, and possible interest rate hikes, make it impossible to cut the budget deficit.

"If all that comes together, then people really don't want to hold Spanish debt," said Ben May at Capital Economics.