Madrid Protesters March Again as Spain Braces for Cuts

Madrid Protesters March Again as Spain Braces for Budget Cuts
Protesters take part in a demonstration in Madrid on September 26, 2012. Photographer: Dominique Faget/AFP/Getty Images

Spanish Prime Minister Mariano Rajoy meets ministers today to approve a 2013 austerity budget as protests in the capital and dissent from regional leaders deepen his predicament over seeking a bailout.

Rajoy is vowing to cut the deficit by at least 18 billion euros ($23.2 billion) next year, defying tens of thousands of demonstrators who fought with police in Madrid this week to demand the premier reverse course and resign. Deputy Prime Minister Soraya Saenz de Santamaria, Economy Minister Luis de Guindos and Budget Minister Cristobal Montoro will brief reporters on the budget and a package of reforms at 5 p.m. in Madrid.

“Rajoy is likely to face a very tough end of year in terms of social discontent,” said Antonio Barroso, a political analyst at Eurasia Group in London and a former Spanish government pollster. “Protests are likely to continue in the future, and the overall degree of mobilization could increase if trade unions decide to call for a general strike.”

Rajoy is struggling to persuade European peers and investors that he can tackle the crisis. Spain’s bonds have slumped as Rajoy’s meditation on whether to ask for external aid stretches on.

Three people were arrested and three injured last night as demonstrators returned to the site of earlier clashes near the Spanish parliament. Rajoy told a conference in New York yesterday that the “immense majority” of Spaniards aren’t on the street and he still has three years to overhaul the economy.

Bond Yields

The Cabinet convened an hour later than usual at 11 a.m. because the prime minister was traveling back from New York and the meeting is taking longer than usual due to the volume of material to be discussed, said a government spokeswoman, who asked not to be named in line with government policy.

Spanish bond yields, which rose by the most in two months yesterday, dropped 10 basis points to 5.96 percent while the benchmark Ibex stock index gained 0.3 percent at 2:12 p.m. in Madrid. Bank deposits fell 1.1 percent on the month in August, the Bank of Spain said today.

European leaders are setting out their plans for the next phase of fiscal consolidation as strains emerge in a blueprint for closer financial union. Lawmakers in Chancellor Angela Merkel’s coalition today urged the German leader to set hurdles to slow large banks’ entry into a common framework.

French Cuts

French President Francois Hollande will tomorrow set out plans to cut the deficit to 3 percent of the economy next year when he unveils his 2013 budget. In Greece, where police yesterday broke up an anti-austerity demonstration by firing tear gas into the crowd, Prime Minister Antonis Samaras wrung a deal from his coalition partners to back a two-year spending plan. That may unlock further aid if Samaras can win the support of the European Commission and the other institutions tracking his progress.

Rajoy’s efforts to restore investor confidence and voters’ faith in his leadership were set back on Sept. 25 when Catalan President Artur Mas called early elections to push for “self-determination” for the country’s largest regional economy. Rajoy hasn’t responded to the challenge, saying only that he respects the regional government. Mas yesterday proposed a referendum on the region’s future.

Basque Nationalist leader Inigo Urkullu, set to claim the regional presidency in an Oct. 21 vote, said his party also wants to renegotiate its tax contribution to the central government and will push for more sovereignty.

‘Clear Fractures’

“Spain is increasingly slipping out of his hands,” opposition Socialist leader Alfredo Perez Rubalcaba said yesterday in Parliament. “There are clear fractures in Spain and the one I’m most worried about is social fracture.”

As Rajoy struggles to keep Spain on track, the outlook for the euro region is deteriorating. Economic confidence in the bloc fell unexpectedly in September and at least five member states have slipped into recession.

Even so, Italy’s borrowing costs dropped at an auction of five- and 10-year bonds today, distancing Prime Minister Mario Monti from the problems facing Spain. The extra yield investors demand to hold 10-year Spanish debt rather than Italian paper jumped to 85 basis points yesterday, the most in more than a week. The spread narrowed to 80 points today.

Rajoy didn’t mention Catalonia in a speech to the Americas Society in New York, where he focused instead on efforts to overhaul an economy that is suffering from its second recession in three years. He praised Spaniards who put up with austerity and hardships without protesting.

‘Huge Difficulties’

“They are the people who suffer, who are seeing huge difficulties and face many problems,” he said.

Rajoy said Sept. 25 he will create an independent fiscal authority, following European recommendations. The Cabinet will also approve a package of measures to jumpstart the economy that Economy Minister Luis de Guindos pledged to European peers earlier this month.

While the government has already rewritten labor-market rules, changed tax structures and taken steps to reduce bureaucracy and regulation, the European Union and International Monetary Fund have called for additional moves to make the economy more competitive.

They may be asked to accept deeper cuts today as the government presents a spending plan designed to reduce the deficit to 4.5 percent of output next year from 6.3 percent in 2012. That means 18 billion euros of spending cuts or tax hikes so long as Spain meets it target for this year.

Budget Deficit

The central government budget shortfall reached 4.77 percent of gross domestic product in the first eight months. Fitch Ratings said yesterday that regional governments may breach their limit of a combined 1.5 percent deficit as tax revenue slumps. The overall target also includes the social-security system, which is strained by the 25 percent unemployment rate.

“We need to show that the Spanish people and the government are capable of balancing their books to restore confidence,” Dolores de Cospedal, deputy leader of Rajoy’s People’s Party said in an interview on Cadena COPE radio station today. “Whether it’s popular or not, that is what is necessary.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE