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Spain Wins Relief From Austerity as General Strike Rages

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Nov. 14 (Bloomberg) -- Europe’s budget enforcers proposed easing the pressure on Spain to cut its deficit, backing further away from the austerity-first mantra that has dominated the response to the sovereign-debt crisis.

As a general strike against austerity hobbled Spain’s industry and transport system, the European Commission said Spain doesn’t need to compound the budget-cutting pain through the end of 2013 and indicated the country would be eligible for a credit line to shore up its public balance sheet.

“Spain has taken effective action in restoring the sustainability of public finances -- the box is ticked, as long as the implementation is solid and convincing,” EU Economic and Monetary Affairs Commissioner Olli Rehn told reporters in Brussels today. Asked whether Spain meets conditions for aid, he said: “Spain is on track as regards taking policies that will help restore its competitiveness and health of public finances.”

Today’s 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.

The commission’s endorsement failed to lift Spanish markets. Bonds fell, pushing the 10-year yield up by 9 basis points to 5.94 percent as of 6:15 p.m. The extra yield over German levels widened by 8 basis points to 459 basis points. The IBEX 35 stock index slid 0.3 percent.

Banking System

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

Spain has complied with a July order to take “effective action” to attack the deficit, Rehn said. That order 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 looser target appears out of reach, according to the 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.

Budget Cuts

Rajoy is implementing the deepest budget cuts on record in Spain, taking the axe to spending on health, education and jobless benefits, while increasing sales tax and levies on income.

Rehn zeroed in on the “structural” deficit, which factors out the declines in tax receipts and higher welfare spending that are automatically triggered by an economic contraction. Still, Rehn said “the measures announced so far for 2014 fall short of what is required” and urged Spain to supply details “shortly.”

That warning resonated in Madrid. In a statement, the Economy Ministry welcomed the praise for the steps in 2012 and 2013 and said it “reaffirms the same commitment for future years.”

Spain’s economy will shrink 1.4 percent in 2012 and by the same amount in 2013, according to the commission forecasts. That makes for four contractions in five years, with the lone trickle of 0.4 percent growth coming in 2011.

Protests including today’s country-wide strike have become regular events in Spain, plagued by unemployment of 25.8 percent in September and a youth jobless rate of 54.2 percent.

‘Hard Choices’

Fixing the public finances “involves hard choices and sacrifices for many parts of the population,” Rehn said. “Progress is being made even if the situation faced by many Spaniards remains very difficult.”

Euro-area finance ministers need to approve the finding that no further cuts are needed through the end of 2013. They meet on Nov. 20 on the Greek aid program with the next regular meeting set for Dec. 3.

To contact the reporter on this story: James G. Neuger in Brussels at jneuger@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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