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Spain unveils austerity budget

September 28, 2012

MADRID, Sept 27: Spain’s government met on Thursday to take an axe to spending in a new budget for 2013, unswayed by angry protests but bowed by markets anticipating a full sovereign bailout, and soon.

Spain has said it will lop spending and boost taxes to rake in 39 billion euros in the budget, adding to the pain that sent thousands of protesters into Madrid’s streets on the previous two nights. The formulation of 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 the EU, Madrid could be a step closer to a broader bailout.

Once Spain formally requests the bailout, it would benefit from a bond-buying programme for troubled states that was outlined by the ECB on September 6. Such a programme would curb Spain’s borrowing costs but to qualify Madrid would have to formally apply for help from European Stability Mechanism (ESM) and submit to its conditions.

“Spain hopes that with this budget it is doing enough to qualify for support from the ESM and hence the ECB if need be,” said Holger Schmieding, analyst at German private bank Berenberg.

“The Rajoy administration remains ready to do what it takes to turn Spain around but apparently wants to present all that it has to do as Spanish decisions, not as conditions imposed on Spain by outsiders,” he said in a report.

Spanish borrowing costs fell after the ECB plan was unveiled but rates picked up again recently as doubts resurfaced about when Madrid would seek help.

In an interview with the Wall Street Journal in New York this week, however, Rajoy said that if Spanish borrowing costs were too high for too long, “I can assure you 100 per cent 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 early afternoon trade, the Madrid stock exchange’s IBEX 35 index eased 0.2 per cent to 7,852.8 points and the rate on Spanish 10-year bonds hovered above 6.0 per cent, a level seen as unsustainable over the long term.

On Wednesday, markets took a hit as investors watched the growing protests in Spain and Greece. Markets fretted, too, over the north-eastern 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.—AFP