Spain says economy to likely slump in the second quarter

Spain said it would meet its deficit targets this year despite a new slippage in its regions' accounts and a further contraction of the economy in the second quarter.

Economy Minister Luis de Guindos said economic activity would likely slump by another 0.3 percent between April and June, further fuelling doubts about the country's ability to get a grip on in its finances and nurse an ailing banking sector back to health.

The shrinking economy along with missed fiscal targets, chronically high unemployment and rising bad loan rates in the banking sector have stoked concerns that Spain may need outside help to manage its finances.

That has roiled markets and driven the country's debt servicing costs closer to unsustainable levels this month.

Centre-right Prime Minister Mariano Rajoy told German Chancellor Angela Merkel on Sunday in Chicago that the banking system did not need external aid.

Auditors will soon begin an independent look at Spain's banking system to see whether the government must pump more funds into the banks after four different restructurings have failed to restore confidence in the lenders.

Any hopes that the impact of support for the banks might be eased by an upturn in the economy look premature.

"What we see is that (the economy in) the second quarter will have a relatively similar behavior to the first quarter, when it contracted by 0.3 percent," de Guindos told businessmen and journalists in Madrid.

The government admitted late on Friday its 2011 public deficit was higher than it had previously reported due to adjusted accounts in three of its regions.