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MADRID (Reuters) - Spain created an emergency fund to protect its regional governments from defaulting and warned pensions will also be overhauled as public anger mounted on Friday over the deep spending cuts needed to dodge an international bailout.
After a weekly cabinet meeting, the government gave details of the 65-billion-euro ($80-billion) austerity package Prime Minister Mariano Rajoy announced on Wednesday.
Ministers approved an overhaul of city and regional governments, wage cuts for public workers and cuts in unemployment benefits. They said they would also pass this month a reform of the energy sector and laws to liberalize the rail, road and air transport sectors.
Workers blocked streets and railways in Madrid in protests against cuts which they said hurt ordinary people more than the bankers and politicians blamed for the country's economic crisis.
More than 100 civil servants gathered outside the presidential palace, whistling and booing, as Prime Minister Mariano Rajoy's ministers convened under pressure from euro zone leaders and financial markets to approve the new budget plan.
"Spaniards are living today one of the most difficult and traumatic moments of our history, a crisis which has muted into a daily drama for millions of Spaniards," said Deputy Prime Minister Soraya Saenz de Santamaria at a news conference.
Acknowledging the widespread economic pain, she added: "Thousands of Spaniards have been pushed to the edge, and millions are unemployed."
Spain, which enjoyed 30 years of almost uninterrupted economic growth until 2007, is now on the front line of the 2-1/2-year euro zone debt crisis after crippled banks, indebted regions and a new, deep recession stretched the country's public finances and unnerved investors.
Its borrowing costs have soared in recent months and many investors believe that after seeking up to 100 billion euros for its banks, the government could soon follow Greece, Ireland and Portugal in seeking a state bailout.
As expected, the government approved on Friday a new mechanism to help Spain's 17 autonomous regions, currently shut out of international financial markets, to fund themselves and repay their debts.
The instrument, which will have a maximum capacity of 18 billion euros, will be funded through a 6-billion-euro loan from the state lottery and by the Treasury.
The regions will however retain full responsibility to repay any loan they obtain from the fund and they will have to meet conditions including more work on cutting their public deficits.
Economy Minister Luis de Guindos said the Treasury, whose credit rating is already on the verge of junk territory and could be affected by this new burden, would not change its debt issuance calendar.
Among other expected measures, the government said increases in value-added tax rates would take effect on September 1, after the end of the tourism season. The general VAT rate will be raised to 21 percent from 18 percent and the reduced rate for the leisure industry to 10 per cent from 8 percent.
It confirmed it would pass this month deep reforms of the energy as well as rail, road and air transport sectors. It will also eliminate tax breaks on properties.
Saenz de Santamaria said the government would discuss with other political parties a bill to guarantee the sustainability of the pension system. Such a reform - which would break one of the last campaign pledges that Rajoy has so far managed to keep - is a long-standing demand of the International Monetary Fund and the European Commission.
Rajoy said on Wednesday the discussion would be based on recommendations from the European Union to establish a stronger link between the pension schemes and life expectancy.
Analysts believe this last austerity package, although it may have won Spain time with markets and praise from Europe, could deepen the country's economic woes rather than solve them.
They also say Spain's government has few cards left to play to avoid a state bailout. Falling revenues will make it hard to control spiraling debt and meet deficit targets, even after they were eased this week.
($1 = 0.8167 euros)
Writing by Julien Toyer; Editing by Fiona Ortiz/Ruth Pitchford