MADRID — In the early hours of Tuesday morning, Spain squeezed additional concessions from its euro currency bloc partners, both in terms of guaranteeing rescue aid for its banks and loosening Madrid’s budget deficit targets.
Now, though, comes another challenge for Prime Minister Mariano Rajoy: ensuring that Spain can actually meet the relaxed deficit goals that it negotiated.
On Wednesday, Mr. Rajoy is expected to announce to Parliament yet another package of austerity measures, this time meant to lower Spain’s deficit to 6.3 percent of gross domestic product, as agreed to in Brussels on Tuesday.
Only four months ago, Europe had set a deficit target for Spain of 5.3 percent of G.D.P., but it has been increasingly clear that the country, deep in recession, is not going to come close to meeting that goal.
The latest round of austerity steps is expected to be a blend of spending cuts and tax increases, as well as other measures like extending the working hours of civil servants.
All of which, however, could sink Spain deeper into recession, notably by stifling consumer spending. “We are in effect talking about strangling further an economy whose slowdown has recently been worse than expected,” said Jordi Fabregat, a finance professor at the Esade business school in Barcelona.
“Given the seriousness of Spain’s financing problems, there is no other option but to cut more, but somehow not to the point where you kill off the economy altogether.”
After another marathon round of negotiations, finance ministers from the 17 euro zone member countries reached a tentative agreement early Tuesday in Brussels on the terms of Spain’s banking bailout, including a guarantee to make available by the end of this month €30 billion, or $36.8 billion, of the €100 billion, or $122.6 billion, of rescue assistance that was pledged last month.
On news of that agreement, investors on Tuesday slightly reduced the pressure on Madrid’s borrowing costs. The yield, or interest rate, on Spain’s benchmark 10-year government bonds fell back to 6.73 percent on the open market, from almost 7 percent on Monday.
Even that slightly lower level, though, is seen as unsustainable in the medium term. Additional banking bailout payments are expected this year, after Spain completes further audits of its troubled banks. In return, however, Spain’s banking overhaul will be subject to much tighter European monitoring.
Spain’s European partners are also demanding further evidence from Mr. Rajoy that he can both clean up Spain’s public finances and enforce economic changes that would return Spain to the growth track.
Mr. Rajoy’s conservative Popular Party was elected in November largely because voters punished the previous Socialist administration for its economic mismanagement. Instead of fueling confidence, however, Mr. Rajoy and his team have since broken most of the economic pledges made to voters.
On Wednesday, for instance, Mr. Rajoy is expected to bow to European pressure and announce an increase in the value-added tax, a form of sales tax.
As recently as April, Luis de Guindos, the economy minister, insisted that raising the V.A.T. was “absolutely” off the agenda for this year, because it could choke off consumer spending.
In fact, some analysts warn of the danger of seeing a steep fall in tax revenue in the second half of 2012, on the assumption that higher taxes would reduce private spending and create further incentives for tax evasion.
“The current situation demonstrates a clear inability to collect taxes,” Santiago López Díaz, an analyst in Madrid for the brokerage house Exane, wrote in a note to clients. Budget data released last month by Madrid indicated how far off target the country was from its deficit-reduction targets.
For the first five months of the year alone, the central government’s budget deficit was already at 3.41 percent of G.D.P. Even if Mr. Rajoy manages to tighten budgetary control at central government level, Spain’s fiscal discipline is also dependent on 17 regional governments that account for half of the country’s public spending.
Madrid has ordered regions to cut their own deficits to 1.5 percent of G.D.P. this year. But some of the regions have instead recently warned that they were close to fiscal asphyxiation, particularly in terms of meeting their debt refinancing obligations after having their credit ratings lowered to speculative, or junk, level.
A reduced credit rating is a sign of increased risk and leads investors to demand a higher return for lending money to a government by buying its securities. “Obviously, if the regions don’t comply, the general government deficit can’t be on target,” Edward Hugh, an economist in Barcelona, said.
Among the most vulnerable regions are Andalusia and Catalonia, which are also Spain’s most populous. Mr. Hugh predicted that Madrid would have to take over budgetary control in at least one of these two regions in coming months, “which naturally will lead to even more political tensions.”
The new round of austerity measures also risks setting off more social unrest in a country where almost a quarter of the work force is already unemployed.
While the surge in joblessness initially hit mostly construction workers and unskilled labor, “with the restructuring of the banking system and of the state, the job losses are now hitting the middle class hard, and there is despair and anger, particularly with the perception of socialism for the rich — the banks get rescued but nobody else,” warned Luis Garicano, a professor at the London School of Economics.
“The successive plans of Spain and of Europe do not let people see any light at the end of the tunnel,” he said, “and the government is doing a horrendous job at communicating what is going on, why it is doing what it is doing and what comes next.”
Mr. Garicano’s tunnel analogy seemed particularly appropriate Tuesday, as columns of striking coal miners reached Madrid.
The so-called black march by the miners was the culmination of a monthlong protest against plans by the government to cut further energy subsidies, particularly to a coal sector that has long relied on state aid to stay afloat.
The protests have also recently led to violent clashes with security forces in Asturias, a northern region where striking miners also attempted to set up roadblocks to vent their frustration.
Among the miners who arrived in Madrid on Tuesday was Santiago Marzo, 47, who has worked for 25 years in the Ariño coal mine, in the eastern province of Teruel.
He set out from his mine on June 22, since then covering about 400 kilometers, or 250 miles, on foot to reach Madrid.
“This is a financial crisis whose consequences are being paid not by the politicians and bankers but by the most vulnerable people in our society,” Mr. Marzo said, as he inspected his feet for fresh blisters.
“I don’t see any ray of light if subsidies are cut this year and my mine closes, because I live in an area that offers zero job alternatives at the moment.”
nytimes.com
Now, though, comes another challenge for Prime Minister Mariano Rajoy: ensuring that Spain can actually meet the relaxed deficit goals that it negotiated.
On Wednesday, Mr. Rajoy is expected to announce to Parliament yet another package of austerity measures, this time meant to lower Spain’s deficit to 6.3 percent of gross domestic product, as agreed to in Brussels on Tuesday.
Only four months ago, Europe had set a deficit target for Spain of 5.3 percent of G.D.P., but it has been increasingly clear that the country, deep in recession, is not going to come close to meeting that goal.
The latest round of austerity steps is expected to be a blend of spending cuts and tax increases, as well as other measures like extending the working hours of civil servants.
All of which, however, could sink Spain deeper into recession, notably by stifling consumer spending. “We are in effect talking about strangling further an economy whose slowdown has recently been worse than expected,” said Jordi Fabregat, a finance professor at the Esade business school in Barcelona.
“Given the seriousness of Spain’s financing problems, there is no other option but to cut more, but somehow not to the point where you kill off the economy altogether.”
After another marathon round of negotiations, finance ministers from the 17 euro zone member countries reached a tentative agreement early Tuesday in Brussels on the terms of Spain’s banking bailout, including a guarantee to make available by the end of this month €30 billion, or $36.8 billion, of the €100 billion, or $122.6 billion, of rescue assistance that was pledged last month.
On news of that agreement, investors on Tuesday slightly reduced the pressure on Madrid’s borrowing costs. The yield, or interest rate, on Spain’s benchmark 10-year government bonds fell back to 6.73 percent on the open market, from almost 7 percent on Monday.
Even that slightly lower level, though, is seen as unsustainable in the medium term. Additional banking bailout payments are expected this year, after Spain completes further audits of its troubled banks. In return, however, Spain’s banking overhaul will be subject to much tighter European monitoring.
Spain’s European partners are also demanding further evidence from Mr. Rajoy that he can both clean up Spain’s public finances and enforce economic changes that would return Spain to the growth track.
Mr. Rajoy’s conservative Popular Party was elected in November largely because voters punished the previous Socialist administration for its economic mismanagement. Instead of fueling confidence, however, Mr. Rajoy and his team have since broken most of the economic pledges made to voters.
On Wednesday, for instance, Mr. Rajoy is expected to bow to European pressure and announce an increase in the value-added tax, a form of sales tax.
As recently as April, Luis de Guindos, the economy minister, insisted that raising the V.A.T. was “absolutely” off the agenda for this year, because it could choke off consumer spending.
In fact, some analysts warn of the danger of seeing a steep fall in tax revenue in the second half of 2012, on the assumption that higher taxes would reduce private spending and create further incentives for tax evasion.
“The current situation demonstrates a clear inability to collect taxes,” Santiago López Díaz, an analyst in Madrid for the brokerage house Exane, wrote in a note to clients. Budget data released last month by Madrid indicated how far off target the country was from its deficit-reduction targets.
For the first five months of the year alone, the central government’s budget deficit was already at 3.41 percent of G.D.P. Even if Mr. Rajoy manages to tighten budgetary control at central government level, Spain’s fiscal discipline is also dependent on 17 regional governments that account for half of the country’s public spending.
Madrid has ordered regions to cut their own deficits to 1.5 percent of G.D.P. this year. But some of the regions have instead recently warned that they were close to fiscal asphyxiation, particularly in terms of meeting their debt refinancing obligations after having their credit ratings lowered to speculative, or junk, level.
A reduced credit rating is a sign of increased risk and leads investors to demand a higher return for lending money to a government by buying its securities. “Obviously, if the regions don’t comply, the general government deficit can’t be on target,” Edward Hugh, an economist in Barcelona, said.
Among the most vulnerable regions are Andalusia and Catalonia, which are also Spain’s most populous. Mr. Hugh predicted that Madrid would have to take over budgetary control in at least one of these two regions in coming months, “which naturally will lead to even more political tensions.”
The new round of austerity measures also risks setting off more social unrest in a country where almost a quarter of the work force is already unemployed.
While the surge in joblessness initially hit mostly construction workers and unskilled labor, “with the restructuring of the banking system and of the state, the job losses are now hitting the middle class hard, and there is despair and anger, particularly with the perception of socialism for the rich — the banks get rescued but nobody else,” warned Luis Garicano, a professor at the London School of Economics.
“The successive plans of Spain and of Europe do not let people see any light at the end of the tunnel,” he said, “and the government is doing a horrendous job at communicating what is going on, why it is doing what it is doing and what comes next.”
Mr. Garicano’s tunnel analogy seemed particularly appropriate Tuesday, as columns of striking coal miners reached Madrid.
The so-called black march by the miners was the culmination of a monthlong protest against plans by the government to cut further energy subsidies, particularly to a coal sector that has long relied on state aid to stay afloat.
The protests have also recently led to violent clashes with security forces in Asturias, a northern region where striking miners also attempted to set up roadblocks to vent their frustration.
Among the miners who arrived in Madrid on Tuesday was Santiago Marzo, 47, who has worked for 25 years in the Ariño coal mine, in the eastern province of Teruel.
He set out from his mine on June 22, since then covering about 400 kilometers, or 250 miles, on foot to reach Madrid.
“This is a financial crisis whose consequences are being paid not by the politicians and bankers but by the most vulnerable people in our society,” Mr. Marzo said, as he inspected his feet for fresh blisters.
“I don’t see any ray of light if subsidies are cut this year and my mine closes, because I live in an area that offers zero job alternatives at the moment.”
nytimes.com
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