Police clash with protestors during the demonstration at the parliament against austerity measures announced by the Spanish government in Madrid, Wednesday, Sept. 26, 2012. (AP Photo/Andres Kudacki)
MADRID (AP) — The Spanish government met Thursday to put the final touches to a new round of austerity measures amid mounting concerns over the country's economic future.
Many think the measures, which are expected to include higher taxes and changes to pensions, will be a precursor to a request for help from the European Central Bank.
Recession-hit Spain has come under pressure to tap an ECB bond-buying program, designed to keep a lid on the country's borrowing costs. Throughout the summer, Spain has been hit with high interest rates on its bonds, raising speculation that the country might soon be forced to ask for an international bailout to help it manage its debts.
The ECB's program comes with the condition that Spain has to first ask for assistance from the other 16 countries that use the euro before the central bank will step in and buy its bonds. So far, the government has been reluctant to ask for help for fear of the conditions the eurozone will attach to its aid.
Analysts say the government, led by Prime Minister Mariano Rajoy, hopes Thursday's budget measures will be enough to stop the eurozone imposing further spending and deficit controls when Spain eventually does make a request for assistance.
The country is battling to fulfill an EU commitment to reduce its deficit from 8.9 percent last year to 6.3 percent in 2012, 4.5 percent next year and to 2.8 percent by the end of 2014.
Spain is at the center of the euro currency crisis — its €1.4 trillion ($1.8 trillion) economy is the third largest in the eurozone and any request for a full bailout would stretch the region's finances. The country is struggling in a recession to prop up its shaky banking sector burdened with toxic assets and support its heavily indebted regional governments.
Thursday's budget package comes in the wake of anti-austerity protests in Madrid over the past two nights, big falls in Spanish stocks and increased borrowing rates.
Just hours before the government unveiled the new measures, the interest rate on Spain's 10-year bond edged back over 6 percent — the level it was at when the ECB announced its bond-buying plan.
"Markets have lost patience and now the government will have to ask for help," said Rafael Pampillon, an economist at IE Business school in Madrid, adding that the government had thought it could survive without seeking the rescue.
"This country can't go on with rates this high," said Pampillon, adding, "Spain's only solution is for the ECB to intervene."
The 2013 budget is expected to save some €40 billion ($51 billion), with a 12 percent cut in ministry spending.
The government also is expected to raise pensions by 1 percent but stop indexing them to much higher cost of living rate increases. Other special taxes could be increased but no details have been forwarded. A new body to oversee regional government's adherence to deficit reduction targets is also expected to be set up.
Beside huge regional government deficits, the country also has a major problem with banks hit hard by the collapse of a real estate sector. On Friday, an auditor will release the results of bank stress tests and the government will then judge how much of a €100 billion rescue loan it will tap to help bail them out. Initial estimates say the banks will need some €60 billion.
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