By Michael Birnbaum, Washington Post September 27 2012
BERLIN — Amid a growing sense that Europe is slipping back into instability after months of relative calm, Spanish leaders unveiled sweeping spending cuts and new taxes Thursday in a last-ditch attempt to get their country’s finances on track. But they were silent about whether they would seek a formal bailout to prop up their turmoil-wracked economy.
Europe’s financial crisis appears to be going strong nearly three years after it started, with talks in Greece about its future again at an impasse, European economic indicators pointing toward recession and even relatively strong France confronting a bleak financial outlook. Violent anti-austerity protests rocked Spain and Greece this week, while a June deal to give aid to banks seemed to partially unravel after finance ministers questioned basic assumptions about it.
In Spain, the attempt to close a $52 billion gap in the budget follows $84 billion in grinding cuts and taxes that were announced in July, and it underscores just how difficult the country’s road to recovery may be.
With Spain’s borrowing costs skyrocketing and its overall debt burden rapidly rising, the money raised by new taxes is funneling straight into interest payments. And its recession has been far deeper than anticipated in earlier forecasts, meaning that even these new measures may not be enough to stabilize the economy. In fact, analysts say, they may worsen unemployment, which at 25 percent is already the highest of the 17 nations that share the euro currency.
The measures came after two days of massive anti-austerity protests on the streets of Madrid and renewed separatist efforts in the restive Spanish province of Catalonia. Spanish citizens are increasingly questioning how much more budget pressure they can take.
Also Thursday, Greek leaders announced that they had reached preliminary agreement on $14.8 billion in additional cuts demanded by the international debt inspectors making a do-or-die decision about whether to give Greece a fresh installment of its bailout or leave it to go bankrupt and possibly off the euro. Negotiations have been beset by conflict amid reports that Greece has wildly missed the financial targets that were set out less than a year ago.
And a key European Commission business and consumer survey released Thursday painted a gloomy picture of September, with signs pointing toward a significant recession.
In Spain, Prime Minister Mariano Rajoy has been trying to benefit from the early September promise of aid from the deep-pocketed European Central Bank without actually resorting to that help, because it would require him to seek a bailout and accept strict oversight from European watchdogs who have pushed painful cuts in Greece and other struggling countries.
Affecting a range of citizens
The measures announced Thursday could preempt at least some of the requirements that would be imposed on Spain if it did seek a bailout, thus easing the sting to Spanish sovereignty. Officials repeatedly emphasized that they were acting within European Union recommendations, perhaps an indication that was indeed their plan.
Spanish borrowing costs plunged after the Sept. 6 announcement that the ECB would use “unlimited” resources to buy government bonds from struggling countries if the euro’s future were at stake. But in recent days, markets have caught on to Rajoy’s caution about seeking assistance, and Spanish bond yields are again edging close to the 6 percent mark that many analysts say is a red line of danger.
Most European markets, which closed as the late-in-the-day Spanish announcement was being made, were up slightly. So was the euro, up a hair at $1.29.
In a measure of the political unpopularity of the cuts, Rajoy avoided cameras Thursday, sending out deputies to make the difficult announcement.
“We are complying with . . . our commitments to our European partners,” said Deputy Prime Minister Soraya Saenz de Santamaria in a news conference in Madrid.
The budget proposal in Spain would impose new measures to discourage early retirement and try to get more people to retire at the official age of 65. Some sectors of the economy will be liberalized, and an independent commission will be set up to monitor progress on the structural overhauls, officials said. Several taxes would be increased, and ministry spending would drop 8.9 percent.
The budget is subject to approval by the Spanish parliament, which has been under siege from protesters in recent days. More than half of Spaniards ages 18 to 25 are unemployed.
The plans brought praise from E.U. Economic and Monetary Affairs Commissioner Olli Rehn, who said in a statement Thursday that “the reforms are clearly targeted at some of the most pressing policy challenges.”
But some analysts questioned whether the measures would be enough, suggesting that it is only a matter of time before Spain is forced to seek more European assistance. Rajoy told the Wall Street Journal this week that he has not made up his mind about asking for more help, but that if his country’s interest rates were “too high for too long . . . I can assure you 100 percent that I would ask for this bailout.”
Many analysts see a bailout as inevitable. Spain “has to ask for money, or everyone knows that things will get worse,” said Sony Kapoor, managing director of Re-Define, a Brussels-based think tank. Without a bailout, he said, borrowing costs would spiral upward and deposits would keep emptying from Spanish banks. But he said that the austerity being pushed on Spain was so onerous that he was not sure a bailout would be enough to offset it.
Audit findings coming
There is also fresh uncertainty about future assistance for Spain’s banking system, with the finance ministers of Germany, Finland and the Netherlands saying that governments may for the time being be liable for any European bailout money given to the country’s troubled banks. That would appear to go against an agreement reached in June, which sought to disentangle the financial problems of governments and their banks, and could leave Spain with a burden of up to $129 billion for the help for its banking sector.
On Friday, the results of an audit of Spain’s banks will be released, putting a concrete figure on how much money the troubled sector will need to shore up balance sheets. Rajoy said this week that their financing needs would be significantly less than that.
Spain this year has been trying to reduce its deficit to 6.3 percent of its gross domestic product. Although Spanish officials said Thursday that they would make the target, most analysts expect the government to fall short, making it more difficult to hit a 4.5 percent mark in 2013.
Spain’s problems are compacted by increasing unrest in regions that have long had simmering separatist tendencies, which have been exacerbated by the federal austerity measures. This week, the leader of Catalonia, Arturo Mas, called early regional elections for November, a move that could give extra power to separatists there who are planning a referendum on the region’s future. The promise of more turmoil and perhaps more budget autonomy will only add stress to Spain’s tenuous position on the international bond markets, analysts say.