Rajoy’s Path to Bailout Clears as EU Endorses Austerity

Rajoy’s Path to Bailout Clears After EU Endorses Spain’s Efforts
Pickets call for strike action and protest against government austerity measures inside the terminal at Madrid airport on the morning of a general strike in Madrid, Spain. Photographer: Angel Navarrete/Bloomberg

European Union budget enforcer Olli Rehn removed an obstacle blocking Spanish Prime Minister Mariano Rajoy’s path to a sovereign bailout, endorsing his deficit-reduction efforts as the recession deepened.

The spending cuts and tax increases Rajoy has introduced for this year and next are enough to satisfy the EU, Rehn said yesterday in Brussels. Those policies are also smothering the economy. It contracted 1.6 percent in the third quarter, more than the 1.3 percent in the previous three months, the nation’s statistics institute said today, confirming its estimate.

“Spain has taken effective action in restoring the sustainability of public finances,” said Rehn, the economic and monetary affairs commissioner. “The box is ticked, as long as the implementation is solid and convincing.”

The announcement follows concessions to Greece, Portugal and earlier leniency granted to Spain itself, in a further shift away from the fiscal retrenchment that critics say has spread recession across southern Europe and exacerbated the fiscal crisis. Millions of workers across Europe logged off yesterday to protest against austerity as European officials pressed for Rajoy to ease the financial pressure on Spanish companies and consumers by asking for aid.

“Spain must urgently seek the bailout,” European Central Bank Governing Council member Luc Coene said at an event in Ghent, Belgium yesterday. The comments were first reported by De Standaard newspaper and confirmed by central bank officials.

IMF Line

Deputy Economy Minister Fernando Jimenez Latorre today denied Spain is being pushed to seek aid. “It’s not the commission’s role or its aims to incite us to do anything,” Latorre said in Madrid. He denied a report that Spain is considering a credit line from the International Monetary Fund as an alternative to a European bailout. “There is nothing new,” he said.

The yield on Spain’s 10-year benchmark bond today fell five basis points to 5.91 percent at 1:40 p.m., narrowing the spread with similar German maturities to 4.54 percentage points. The nation’s 10-year borrowing costs rose to a euro era record of 7.75 percent on July 25.

Demonstrators gathered near the Spanish parliament in Madrid last night, chanting and singing slogans in favor of the country’s publicly funded health service and against Rajoy’s labor overhaul, which makes it easier to hire and fire workers. The unions have pointed to the record 26 percent unemployment rate as a sign Rajoy’s policies are failing.

Eviction Policy

The government will pass a decree today aimed at sparing families who default on their mortgages from eviction, a government spokesman, who asked not to be named in line with official policy, said late yesterday. Rajoy is pressing on with his mortgage measures alone after talks with the opposition Socialist Party fell apart last night as police and protestors clashed near the parliament building in Madrid.

More than half of all health-care workers and auto workers joined yesterday’s protest in Spain as well as 83 percent of metal workers and 73 percent of teachers, according to the unions. In Italy, where police clashed with protesters in four cities including Rome and Milan, one officer was in a critical condition after being beaten by a gang wielding sticks and bats in Turin, news agency Ansa reported.

The real-estate bubble that hammered the banking system has already forced Spain to tap the EU for 100 billion euros ($127 billion) of aid for its banks and the government is deliberating whether to call on Europe’s rescue fund to help shore up its own accounts.

‘Effective Action’

Spain has complied with a July order to take “effective action” to attack the deficit, Rehn said. That was coupled with permission for Spain to take an extra year, until 2014, to bring the deficit below the euro-zone limit of 3 percent of gross domestic product.

Even that appears out of reach, according to the European Commission. It forecast on Nov. 7 that Spain’s shortfall would equal 8 percent in 2012, 6 percent in 2013 and 6.4 percent in 2014. Rehn said the deficit-reduction deadline remains 2014 for now, and will be reviewed next year.

Asked whether Spain meets conditions for aid, he said yesterday: “Spain is on track as regards taking policies that will help restore its competitiveness and health of public finances.”