Spain takes a big axe to spending on Thursday when it unveils a new budget for 2013, unswayed by angry protests but bowed by markets anticipating a full sovereign bailout, and soon.
Spain is expected to lop spending and boost taxes to rake in 39 billion euros ($50 billion) in the budget, adding to the pain that sent thousands of protesters into Madrid’s streets in the previous two nights.
The 2013 budget, to be followed by the release of an audit of Spain’s sickly banking system on Friday, is seen on the markets as one of the final acts before a sovereign bailout.
Prime Minister Mariano Rajoy’s right-leaning Popular Party government has already accepted a eurozone rescue loan for the banks of up to 100 billion euros.
If the Spanish cabinet adopts a budget with labour market and other key reforms sought by the IMF and European Union, Madrid could be a step closer to a broader bailout.
Such reforms would mean “the government might avoid having to implement new policy measures to receive a bail-out in the future, paving the way for a deal to be put in place quickly,” said a report by Ben May, London-based economist at London based financial analysts Capital Economics.
Once Spain formally requests the bailout, it would benefit from a bond-buying programme for troubled states outlined by the European Central Bank on September 6.
Such a programme would curb Spain’s borrowing costs. Just the announcement of the ECB plan led market interest rates to drop until recently when doubts resurfaced about when Madrid would seek help.
Rajoy has insisted he wants to know the bailout’s conditions before making such a request.
But in an interview with the Wall Street Journal in New York this week, he said that if interest rates on Spanish debt were too high for too long, “I can assure you 100 percent that I would ask for this bailout.”
After weakening the day before, markets barely budged in the hours before the unveiling of the budget.
In morning trade, the Madrid stock exchange’s IBEX 35 index edged up 0.47 percent to 7,891.1 points and the rate on Spanish 10-year bonds hovered above 6.0 percent, seen as unsustainable over the long term.
On Wednesday, markets took a battering as investors watched the growing protests in Spain and Greece.
Markets fretted, too, over the northeastern Spanish region of Catalonia, which has called snap elections on November 25 in a drive for more independence from the rest of the crisis-hit nation and for greater control over its own finances.
But perhaps the greatest concern on the markets was a joint statement by the German, Dutch and Finnish finance ministers on Tuesday “which cast doubt on whether the rest of the eurozone will bear any of the costs of providing support to Spain’s banks”, May said.
If Spain has to foot the bill for restructuring of its banks, weakened by a 2008 property crash, its overall sovereign debt will rise and its deficit-cutting task will become even more urgent.
Already on the austerity menu for 2013: an increase in sales tax and other taxes to rake in 15 billion euros and cuts in the regions to find another seven billion euros.
Other savings come from lowering unemployment benefits and social assistance, as well as a freeze in public sector hiring.
Analysts say Spain also must act to rein in the cost of pensions, but so far Rajoy has refused to countenance such a step, which would break with an election campaign promise.
Spain’s government aims to claw back a total of more than 150 billion euros between 2012 and 2014: 62 billion euros this year, 39 billion euros next year and 50 billion euros in 2014.
Already, the measures are facing resistance in Spain where a deepening recession has thrown millions out of work and many families into poverty. The unemployment rate is close to 25 percent.
Thousands of protesters rallied near the Spanish parliament for a second straight night on Wednesday.
Shouting “Government resign!” and “We are not afraid”, demonstrators faced off against riot police in the Plaza de Neptuno, the same area of Madrid where officers beat protesters and fired rubber bullets to disperse them Tuesday night.
Spain to unveil new austerity budget
