BERLIN (Washington Post) — Spanish leaders unveiled sweeping spending cuts Thursday in a last-ditch attempt to get their country’s finances on track, but they were silent about whether they would seek a formal bailout to prop up their turmoil-wracked economy.
Amid a growing sense that Europe is slipping back into crisis after months of relative calm, the attempt to close a $52 billion gap in the budget follows a further $84 billion in grinding cuts and taxes that were announced in July, and it underscores just how difficult Spain’s road to recovery may be.
With Spain’s borrowing costs skyrocketing and its overall debt burden rapidly rising, the money saved by new cuts is being rapidly consumed by new debt payments. And its recession has been far deeper than anticipated.
The measures came after two days of massive anti-austerity protests on the streets of Madrid and renewed separatist efforts in the restive Spanish province of Catalonia. Spanish citizens are increasingly questioning how much more budget pressure they can take amid 25 percent unemployment, the highest of the 17 nations that share the euro currency.
With talks in Greece about its economic future again at an impasse and even relatively strong France confronting a bleak financial outlook, concerns are rising that Europe’s crisis is still going strong nearly three years after it started.
Spanish Prime Minister Mariano Rajoy has been trying to benefit from the early September promise of aid from the deep-pocketed European Central Bank without actually resorting to that help, because it would require him to seek a bailout and accept strict oversight from European watchdogs who have pushed painful cuts in Greece and other struggling countries.
The measures announced Thursday could preempt at least some of the requirements that would be imposed on Spain if it did seek a bailout, thus easing the sting to Spanish sovereignty. Officials repeatedly emphasized that they were acting within the recommendations of the European Commission, perhaps an indication that was indeed their plan.
Spanish borrowing costs plunged after the Sept. 6 announcement that the ECB would use “unlimited” resources to buy government bonds from struggling countries if the euro’s future was at stake. But in recent days, markets have caught on to Rajoy’s caution about seeking assistance, and Spanish bond yields are again edging close to the 6 percent mark that many analysts say is a red line of danger.
In a measure of the political unpopularity of the cuts, Rajoy avoided cameras Thursday, sending out deputies to make the difficult announcement.
“We are complying with . . . our commitments to our European partners,” said Deputy Prime Minister Soraya Saenz de Santamaria in a news conference in Madrid, adding that the government would emphasize spending cuts rather than tax increases and would tap $3.9 billion from a reserve fund to cover some of its funding needs.
The budget proposal in Spain would impose new measures to discourage early retirement and try to get more people to retire at the official age of 65. Some sectors of the economy will be liberalized, and an independent commission will be set up to monitor progress on the structural overhauls, officials said.
The budget is subject to approval by the Spanish parliament, which has been under siege from protesters in recent days, and some details were not presented at the news conference but are expected to be included in a presentation to parliament Saturday. More than half of Spaniards between 18 and 25 are unemployed.
But some analysts questioned whether the measures would be enough, suggesting that it is only a matter of time before Spain is forced to seek more European assistance. Rajoy told the Wall Street Journal this week that he has not made up his mind about asking for more help, but that if his country’s interest rates were “too high for too long . . . I can assure you 100 percent that I would ask for this bailout.”
Waiting until the last minute to do it may be needlessly harmful to Spain’s economy, said Gary Jenkins, the director of Swordfish Research. “Rajoy can only hesitate for so long before accepting a bailout because the alternative is probably bankruptcy,” he said in a research note Thursday, before the budget announcement.
There is also fresh uncertainty about the future of assistance for Spain’s banking system, with the finance ministers of Germany, Finland and the Netherlands saying that governments may for the time being be liable for any European bailout money given to the country’s troubled banks. That would appear to go against an agreement reached in June, which sought to disentangle the financial problems of governments and their banks, and could leave Spain with a burden of up to $129 billion for the help for its banking sector.
On Friday, the results of an audit of Spain’s banks will be released, giving a concrete figure about how much money the troubled sector will need to shore up balance sheets. Rajoy said this week that their financing needs would be significantly less than that.
Spain has been trying to reduce its deficit to 6.3 percent of its gross domestic product this year. Although Spanish officials said Thursday that they would make the target, most analysts expect the government to fall short of the mark, thus making it more difficult to make it to a 4.5 percent target in 2013. The Spanish Central Bank said Wednesday that the country’s GDP appears to have “continued to fall at a significant rate” in the third quarter this year. Spanish officials forecast that Spain’s economy would shrink by 0.5 percent in 2013, and they said spending by ministries would drop 8.9 percent next year.
Spain’s problems are compacted by increasing unrest in regions that have long had simmering separatist tendencies, which have been exacerbated by the federal austerity measures. This week, the leader of Catalonia, Arturo Mas, called early regional elections for November, a move that could give extra power to separatists there who are planning a referendum on the region’s future. The promise of more turmoil and perhaps more budget autonomy will only add stress to Spain’s tenuous position on the international bond markets, analysts say.
Most markets in Europe closed up slightly on Thursday, although Spain’s IBEX 35 was down 0.2 percent, Germany’s DAX and London’s FTSE 100 index both closed up 0.2 percent, and France’s CAC 40 closed up 0.8 percent. In the United States, the Dow Jones industrial average was up 0.1 percent and the Standard & Poor’s 500-stock index was up 0.4 percent in early afternoon trading.