Rajoy inches toward aid as protests seethe

MADRID Wed Sep 26, 2012 3:57pm BST

1 of 16. Police charge demonstrators outside the the Spanish parliament in Madrid, September 25, 2012.

Credit: Reuters/Paul Hanna

MADRID (Reuters) - Violent protests in Madrid and growing talk of secession in Catalonia are piling pressure on Spanish Prime Minister Mariano Rajoy as he moves closer to asking Europe for rescue money.

In public, Rajoy has been resisting calls from bankers at home and the leaders of France and Italy to move quickly to request assistance, but behind the scenes he is putting together the pieces to meet the stringent conditions for aid.

With protesters stepping up anti-austerity demonstrations, Rajoy presents painful economic reforms and a tough 2013 budget on Thursday, aiming to persuade euro zone partners and investors that Spain is doing its deficit-cutting homework despite a recession and 25 percent unemployment.

Figures released on Tuesday suggested Spain will miss its public deficit target of 6.3 percent of gross domestic product this year, and on Wednesday the central bank said the economy continued to contract sharply in the third quarter.

By pre-empting reforms demanded by Brussels -- such as creating an independent fiscal auditor -- Rajoy hopes to sell them to voters as home-grown rather than imposed from outside.

Diplomats reported intense last-minute pressure on Madrid on Wednesday from key euro zone policymakers to take tougher measures, notably on freezing pensions.

On Friday, Moody's will publish its latest review of Spain's credit rating, possibly downgrading the country's debt to junk status.

On the same day, an independent audit of Spain's banks will reveal how much money Madrid will need from a 100 billion euro (80.3 billion pounds) aid package that Europe has already approved for the banks.

A STEP CLOSER

Rajoy is gradually shedding his reluctance to seek a sovereign bailout for the euro zone's fourth biggest economy - a condition for European Central Bank intervention to cut his country's borrowing costs.

He suggested in an interview published on Wednesday that he would make the move if debt financing costs remained too high for too long.

"I can assure you 100 percent that I would ask for this bailout," he told the Wall Street Journal, calling the situation he faces right now "fascinating".

He also said he had not made his mind up on whether to maintain inflation indexation of pensions, which could cost the state an extra 6 billion euros this year.

"We need to be sufficiently flexible in order not to create any further problems," he said when asked about pensions.

The interview, the central bank's warning on the third quarter and other factors drove up Spain's borrowing costs, with the yield on the benchmark 10-year bond jumping to 6 percent on Wednesday, a level seen as unsustainable in the medium term.

The blue-chip index of leading stocks fell 3.46 percent to a two-week low, with heavyweight banks BBVA and Santander leading the way.

Markets were also reacting to a letter from Germany, Finland and the Netherlands on Tuesday that implied that rescue funds Spain receives for its banks will remain on its public debt. The three said any future direct recapitalisation of banks by the euro zone's bailout fund should not cover "legacy" problems.

CATALONIA INDEPENDENCE MOVEMENT

The government's drive to rein in regional overspending as part of its austerity measures has prompted a flare-up in independence fervour in Catalonia, the wealthy north-eastern region that generates one-fifth of Spain's economic output.

Just as the euro zone crisis has strained relations between wealthier nations of the north and heavily indebted countries to the south, Spain's crisis has aggravated tensions between the central government and its self-governing regions.

Catalonia needs a 5 billion euros bailout from the central state to meet debt payments this year, but Catalans are convinced they bear an unfairly large share of the country's tax burden.

More than half say they want independence from Spain, the highest level ever.

Artur Mas, the conservative president of Catalonia, announced on Tuesday he would hold early elections in November after Rajoy rejected his call for more tax autonomy. Mas's Convergence and Union, or CiU, party is likely to win an absolute majority in the regional parliament, which he can use to battle Rajoy over spending cuts.

On Wednesday Mas took things further, saying Catalonia should also hold a referendum on independence, which the central government says would be unconstitutional.

Although an independent Catalonia is a remote possibility, the political instability sends a worrying message to investors. Rajoy's People's Party has threatened to take control of the budgets of regions that fail to meet deficit reduction targets despite Catalonia already having made tough austerity measures.

Analysts said Mas, who until recently expressed more moderate aims for Catalan autonomy, was playing a dangerous game.

"In the short term it's not going to help in any way, it's going to increase, if this is at all possible, the lack of confidence in the future of Spain," said Javier Diaz-Gimenez, professor of economics at IESE.

COMMUNICATION PROBLEMS

Anti-austerity groups planned a fresh demonstration on Wednesday evening in Madrid, a day after police fired rubber bullets at thousands of protesters who tried to form a human chain around the parliament building.

Police arrested 35 protesters on Tuesday and 64 police and demonstrators were injured in the clashes.

The relatively small but intense protests this week have added to Rajoy's image problems abroad.

Officials in Brussels and Berlin have accused him of failing to sell his reforms effectively, partly because of confusing messages from his separate treasury and economy ministers and from his own office.

"The problem in the structure of his economic cabinet is transmitting a confused, improvised image," said an economist, who did not want to be named and who said Rajoy will have to name a powerful economic deputy by the end of the year to sort out his communications issues.

The governments of Ireland, Portugal and Greece were all voted out of office after they sought bailouts from Europe.

But Rajoy may have more staying power, especially if he negotiates a bailout "lite", such as a precautionary credit line from the European bailout fund that would not involve taking Spain out of the credit markets.

The uncharismatic conservative has more than three years left to his term and his People's Party has firm control of parliament, with no signs so far of party splits that might force him out early.

(Additional reporting by Paul Day; Editing by Paul Taylor)

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Comments (4)
SCSCSC wrote:
Manana, manana, manana!

It looks like EURO sovereign nations have learnt nothing from the crisis since it broke in 2008.

You would have thought that these nations would have realised that ‘a stitch in time saves nine’ approach might be somewhat beneficial – but No.

The people of the Eurozone deserve better from their leaders – yet again.

Sep 26, 2012 10:21am BST  --  Report as abuse
pavlaki wrote:
Rajoy wants to avoid Troika inspectors in Madrid at all costs for fear of what they will uncover. In the same way that Greece was found to be reporting fudged figures (8 month deficit near E30bil instead of E12.5bil) Spain will be found to have done similar. There is NO WAY that the banks bad debts are as low as reported and the amount the government owes for defence, health costs, payments to national industry are much greater than we have been given. The sooner the Troika get there the better.

Sep 26, 2012 11:43am BST  --  Report as abuse
SCSCSC wrote:
From my perspective, living in the UK’s official number 1 immigration hot spot here in West London, Europe is already broken.

In the last 2 weeks we have seen an unprecedented influx of peoples from all over Europe but especially Eastern Europe. We now have 30+ people living rough in our parks and in our car parks.

My children and I saw a very upsetting sight yesterday. We have two people from Eastern Europe living under a pile of leaves within 5 minutes walk of our house – and it rained most of last night. What on earth is happening in the EU???

The EU has broken Europe. We are witnessing it in front of our very own eyes here in West London. The UK is not even part of the Eurozone yet we are picking up the social and monetary costs like the good European citizen that the UK is.

It is, however, time to close the borders as we are now way beyond what is sustainable and the people arriving now are only looking to what they can take rather than what they can contribute. There are no jobs, like everywhere else in Europe.

Local people are getting angry and asking why Europe’s useless politicians have allowed this to happen and why the UK’s very own useless politicians have not given us a Referendum.

My bet is that the first UK political party to give us a Referendum will no doubt take the next election.

Wake up politicians, it is all over. The EU and Euro are broken.

Long live the people of Europe!

Sep 26, 2012 1:35pm BST  --  Report as abuse
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