Clouds gather over Spain's Rajoy as EU bailout nears

By Julien Toyer

MADRID (Reuters) - Spanish Prime Minister Mariano Rajoy faces a cloudy return from his short summer break as his expected request for European aid in September will spur protests on the street and deepen cracks emerging in his conservative People's Party.

Rajoy's popularity plummeted in the first seven months of his 4-year term as his communications faltered while he enacted successive austerity plans and the euro zone's fourth biggest economy sank into recession with unemployment over 24 percent.

With borrowing costs painfully high - the yield on Spain's benchmark 10-year bond is unsustainable at close to 7 percent - Rajoy is expected to make a formal request for coordinated action from the euro zone rescue funds and the European Central Bank.

A rescue plan of EU buying of Spanish bonds, or a precautionary credit line, would reduce market tension but also come with harsh conditions at a time when protesters have taken to the streets against budget cuts.

The Socialist opposition rejected an earlier agreement for a 100-billion-euros European rescue for Spanish banks and is also against a sovereign bailout, and there are now even voices against it within Rajoy's ruling People's Party (PP).

Privately, senior party members have begun to blame Rajoy - an unlikely crisis manager with a cautious demeanor - as Spain is dragged deeper into the 2-1/2-year-old euro zone debt debacle.

While Rajoy has an ample majority in Parliament that has not shown signs of breaking, PP leaders in the country's 17 autonomous regions have begun to rebel against tight spending controls that have forced them to cut back on hospitals and schools and face political backlash.

"We're united behind him but it is not wrong to say that there is a diversity of opinions which are now being expressed," a senior PP member told Reuters.