Germany’s budget deficit outlook brightens as Spain holds successful bond auction

Europe gets better debt news from Germany, Spain

BERLIN — Europe got scraps of positive news Thursday in its battle to overcome a government debt crisis, as Germany cut its budget deficit forecast, Spain received strong interest for a bond auction and a eurozone rescue fund received its final approval vote.

Germany cut its 2010 deficit prediction to 4.5 percent from 5.5 percent, a sign that Europe’s largest economy is making progress in strengthening its government finances, though it was already one of the stronger cases.

It also said it expects its deficit to drop to 3 percent, the maximum allowed under European Union rules, in 2012. It had long pledged to get the shortfall below that level by 2013.

The Finance Ministry pointed to lower spending on benefits as a result of moderate unemployment, as well as a higher tax take and proceeds from an auction of cell phone frequencies. With the economy growing, that has allowed it to reduce its plans for new borrowing this year.

Spain, a recent focus of market concern, raised nearly euro3 billion ($3.85 billion) in 15-year bonds Thursday. Demand was more than double the amount on offer — helping allay fears that Spain, like Greece, may have to seek a bailout.

“This result confirms that appetite for Spanish paper is alive,” analysts at UniCredit Research said, adding that it was “a remarkable result.”

Along with others in the 16-nation eurozone, Germany and Spain have embarked on austerity drives in the wake of the debt crisis that started in Greece and concentrated market attention on European public finances.

That crisis culminated in May’s agreement on a euro750 billion ($950 billion) financial rescue package that can be tapped if other indebted EU nations need help.

The newly elected center-right coalition government in Bratislava initially balked at paying Slovakia’s euro4.37 billion share. However, it signed up on Thursday, and the deal now goes to parliament for approval.

The government did, however, reject paying Slovakia’s euro800 million share — less than 1 percent — of a separate euro110 billion rescue package from eurozone partners and the International Monetary Fund for Greece.

Athens narrowly avoided default in May when it received the first installment of the package.

Greek banks took steps Thursday to consolidate the country’s financial sector. The private Piraeus Bank offered to buy stakes in two state-controlled banks, ATEBank and Hellenic Postbank — a move that comes after Greece’s finance minister said there is an urgent need for Greek banks to consider mergers.

The proposal “will be beneficial to Greek society, the banks themselves, the state and the general atmosphere so that we can escape this atmosphere of gloom,” Piraeus Bank CEO Michalis Sallas said.

The euro has rebounded recently after being pounded for months amid worries about the debt crisis, and topped $1.28 on Thursday for the first time in two months. It rose as high as $1.2879 in afternoon European trading — up from $1.2729 in the early morning.

Germany forecast in January that its deficit would swell to 5.5 percent this year in the aftermath of the economic crisis.

The country had reduced its budget deficit to zero in 2008 before the crisis hit, but saw it climb to 3.1 percent last year — narrowly breaching the EU rules.

The Finance Ministry said Thursday that it now expects the deficit to peak at 4.5 percent this year before declining to 4 percent next year, 3 percent in 2012, 2 percent in 2013 and 1.5 percent in 2014.

Germany has settled into modest growth over the past year, helped in particular by its traditional export strength. The government has said the economy may grow by 2 percent in 2010 instead of the officially forecast 1.4 percent.

In Greece, flights were grounded Thursday by a civil servants’ protest against austerity measures and an overhaul of the country’s pension system.