Analysis: Spain's new austerity buys some time, not solution

Thu Jul 12, 2012 2:44pm EDT
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By Julien Toyer

MADRID (Reuters) - Spain may have won some time with markets and praise from Europe but it has little left in the locker to avoid a state bailout as a new 65-billion-euro austerity program could deepen the country's economic woes rather than solve them, analysts say.

The measures announced on Wednesday saw Prime Minister Mariano Rajoy backtrack on many of the pledges he campaigned on six months ago, to meet demands made by the European Union and put the Spanish economy under de facto external administration.

The austerity plan was a condition for being given an extra year to bring the public deficit in line with EU rules and for an up to 100-billion-euros bailout of the country's crippled lenders. But neither concession will put Spain on the path to recovery.

Ailing banks, badly hit after a decade of unsustainable lending ended with a property crash four years ago, coupled with highly-indebted regions have pushed Spanish borrowing costs though the roof.

Investors and analysts are worried that the latest measures will only make things worse for a country already in recession which, if it deepens, will cut government revenues and make even the newly relaxed debt targets harder to meet.

"It doesn't address the funding issue and the problem of a lack of demand. It will only cut the revenues, the capacity to generate jobs and will even make more difficult to repay the debt," said Juan Torres Lopez, professor of economics at the Seville University. "The deficit targets will also be more difficult to meet."

Rajoy, fronting up in parliament to spell out the pain in person, announced a 3-point hike in the main rate of value-added tax on goods and services to 21 percent and cuts in unemployment benefits and civil service pay and perks in a speech interrupted by jeers and boos from the opposition.

He also announced new indirect taxes on energy, plans to privatize ports, airports and rail assets, and a reversal of property tax breaks his Popular Party restored last December.   Continued...

Off-duty police officers and fire fighters protesting over government austerity measures are held back by police officers as they shout at the driver of a vehicle exiting the Parliament building in Madrid July 12, 2012. REUTERS/Juan Medina