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Spain faces toughest budget of post-Franco era

31 march 2012, 12:55
People attend a demonstration in Madrid. ©AFP
People attend a demonstration in Madrid. ©AFP
Hours after facing down a general strike, which descended into violence in places, Spain's right-leaning government unveils Friday huge cuts in what may be the toughest budget of the post-Franco era, AFP reports.

Hundreds of thousands of protesters swamped Spain's streets on Thursday to back the strike which was marred by clashes in Barcelona where youths set fire to a two-storey Starbucks.

Unions said nearly a million people took part in Madrid alone to decry labour reforms, the spending cuts and soaring unemployment in a country plunging into recession.

The demonstrations, overwhelmingly peaceful in most of the country, erupted in violence in a central portion of the northeastern city of Barcelona. Scuffles also broke out in Madrid.

Police shot smoke cannisters and fired rubber bullets into the ground so they would ricochet into people's legs in Barcelona, television pictures showed, as a rubbish container burned in a city street.

Prime Minister Mariano Rajoy has said he is determined to stand by his promises to eurozone partners to slash the deficit, even at a time of soaring unemployment and recession.

The Popular Party government must craft a 2012 budget to bring down the public deficit to the equivalent of 5.3 percent of economic output this year from 8.51 percent last year.

That means at least 20-30 billion of euros ($26-40 billion) in austerity measures, on top of 8.9 billion euros in spending cuts and 6.3 billion euros in tax increases already announced this year.

Spain needs to squeeze about 50 billion euros out of the budget if it is stand by its deficit-cutting targets and calm mounting concern in Europe and on financial markets, analysts say.

The task is complicated by the recession, with the government predicting a 1.7-percent slump in economic output this year.

"It will be about 50 billion euros, maybe even a bit more," said Soledad Pellon, analyst at the brokerage house IG Markets.

Rating agency Moody's Investors Service estimates Spain must find 41.5 billion euros in spending cuts and revenue increases. The foundation of savings banks' thinktank Funcas puts the figure at 55 billion euros.

"The budget will be very severe," Rajoy warned this week.

"The most austere since democracy," introduced after the 1975 death of General Francisco Franco, said Budget Minister Cristobal Montoro. "It needs a budgetary effort that up to now we have probably never made in our country."

The budget will be closely scrutinised in Europe, where Italian Prime Minister Mario Monti spoke at the weekend of the bloc's concerns about Spain's fiscal situation.

"It takes very little for contagion to quickly spread," he warned.

Privately, government officials say Monti's comment was unwelcome and likely an effort to deflect attention from Italy's own problems.

But French Foreign Minister Alain Juppe piled on the misery Tuesday, saying Spain would have a tough time meeting its targets and its economy was much worse than France's.

Financial group Citi's chief economist Willem Buiter said Spain would likely need emergency help from international lenders this year to shore up its banks and public finances.

"Spain looks likely to enter some form of a troika programme this year" to ensure access to favourable credit, he said, referring to the European Union, European Central Bank and International Monetary Fund.

"The compromise 5.3 percent of GDP deficit target for 2012 and the unchanged 3.0 percent target for 2013 seem unlikely to be realised in our analysis," Buiter wrote in a report.

He tipped a 2.7 percent contraction this year in the Spanish economy and warned that debt may be higher than previously thought.

"Sovereign debt restructuring is avoidable," the Citi economist wrote, but only with more radical fiscal and structural measures.

Spain's government plans to freeze public sector workers' salaries and cut ministry budgets by some 15 percent but it has ruled out raising value-added tax that would hurt consumption.

That is enough to raise doubts.

"We are among several analysts who think that even doing all that, reducing the deficit to 5.3 percent is almost impossible," San Telmo International Insititute analyst Fernando Faces wrote in the daily Expansion.

Deutsche Bank has doubts, too.

"We do not expect the government to succeed in bringing its deficit to 5.3 percent of GDP this year, as per the European rules," said the bank's analyst Gilles Moec, who expects it to come in at 6.0 percent.

"Since cabinet members over the last few weeks stated that they would avoid significant increases in headline tax rates on top of the December package, we expect the focus on Friday to be on lower expenditure."

Jose Carlos Diez, analyst at Intermoney brokerage, said other countries had shown that reducing the deficit in a recession is difficult because it cuts government receipts and raises expenses for unemployment benefits.

"Suddenly you are rowing against the current, with a capacity to row but in the end you tire out," he warned. "Spain needs more time but Brussels does not seem disposed to give it."

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