Business

Spain slashes spending in bid to head off bailout

Giles Tremlett, Phillip Inman

Spain has crept closer to a bailout as the government leaked plans to cut pension spending.

A government suggestion to cut 50 000 jobs in Spain's public sector as part of its austerity measures has been met with protests from senior ministers and the public. (Dominique Faget, AFP)

And senior bankers and business leaders called for the prime minister, Mariano Rajoy, not to postpone his decision for too long.

Spain will cut up to €4-billion of spending a year by freezing pensions and forcing workers to retire later, sources close to the government told Reuters.

The leak on Friday was part of a strategy by Rajoy's government to put in place as many as possible of the changes that eurozone countries might demand before signing a bailout agreement with them. A new set of proposals will be announced next week, along with the budget for 2013. Rajoy's centre-right government hopes this will allow Spain to sign a deal with fewer conditions imposed by Brussels, making the bailout easier to digest for ordinary Spaniards who are fed up with government austerity measures and soaring unemployment.

Greece, which is negotiating with the troika of the European Union, the European Central Bank (ECB) and the International Monetary Fund, played down speculation that negotiations over its second bailout would be delayed until after the United States elections.

Officials said talks were continuing and the Greek Parliament would be given a full list of spending cuts and tax rises by next week.

Concerns that Parliament will reject the €11.5-billion of savings in Greece were heightened this week when several senior ministers warned they would resign if plans for 50000 public sector job cuts are included in the austerity package.

Effect of a bailout
International bondholders, which have loaned peripheral eurozone countries hundreds of billions of euros, fear that delays over negotiations in Athens and Madrid will cause greater political instability and undermine efforts to reduce debts and push through changes.

On September 20 the head of one of Spain's biggest banks, BBVA boss Francisco Gonzalez, called on the government to ask for the bailout as soon as possible.

The ECB announcement that it would buy bonds to drive down borrowing costs in Spain or any other country that agreed to a bailout with the eurozone's rescue fund has already lowered bond yields, allowing Spain to continue financing itself on the markets – but at high interest rates. That has given Rajoy's government breathing space and some observers now expect him to delay any bailout until after October 21 elections in the northern regions of Galicia and the Basque country.

Others believe he will act before the ratings agency Moody's decides this month whether or not to downgrade Spain's debt to junk status.

The head of Spain's employers' federation, Juan Rosell, also called for the government to act, but asked it to negotiate carefully and unhurriedly to ensure conditions did not stifle the economy. His organisation has already warned that Spain's economy, which is set to shrink by 1.7% this year, will suffer the same sort of decline in 2013.

The government reportedly hopes that it can reduce the effect of a bailout further by asking eurozone countries to allow it to draw on a €100-billion rescue package set aside for Spain's ailing banks. The banks may take only half of that sum and the terms agreed with the European Financial Stability Facility allow for Spain to ask for whatever money is left to be used for something else. Terms might be agreed quickly and could allow the ECB to start buying Spanish bonds on the secondary market. – © Guardian News & Media 2012 

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