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Rajoy inches toward aid as protests, regions seethe

Violent protests in Madrid and growing talk of recession in wealthy Catalonia are piling pressure on Spanish Prime Minister Mariano Rajoy as he moves closer to asking Europe for rescue money.

Rajoy has been resisting calls from influential domestic bankers and the leaders of France and Italy to move quickly to request assistance, but a series of events this week will drive him closer.

With protesters stepping up anti-austerity demonstrations, Rajoy presents more painful economic reforms and a tough 2013 budget today, aiming to persuade eurozone partners and investors that Spain is doing its deficit-cutting homework despite a recession and 25 per cent unemployment. Fresh data on Tuesday suggested Spain will miss its public deficit target of 6.3 per cent of gross domestic product this year, as the central government deficit reached 4.77 per cent at the end of August, already higher than the year-end target.

By front-loading the reforms Rajoy hopes to sell them to voters as home-grown rather than conditions imposed from outside. Diplomats reported intense last-minute pressure on Madrid from key eurozone policymakers to take tougher measures, notably on freezing pensions.

Tomorrow, Moody’s will publish its latest review of Spain’s credit rating, possibly downgrading the country’s debt to junk status.

On the same day, an independent audit of Spain’s banks will reveal how much money Madrid will need from a €100 billion aid package that Europe has already approved for the eurozone’s fourth biggest economy.

Spain’s reluctance to seek a sovereign bailout – a condition for European Central Bank intervention to cut the country’s borrowing costs – could propel the eurozone into deeper trouble.

Rajoy moved one step closer to requesting aid, suggesting in an interview with the Wall Street Journal published yesterday that he would make the move if debt financing costs remained too high for too long.

“I can assure you 100 per cent that I would ask for this bailout,” he told the newspaper, calling the situation he faces right now “fascinating”.

He also said he had not made his mind up on whether to maintain inflation indexation of pensions, which could cost the state an extra €6 billion this year.

“We need to be sufficiently flexible in order not to create any further problems,” he said when asked about pensions.

The government’s drive to rein in regional overspending as part of its austerity measures has prompted a flare-up in independence fervour in Catalonia, the wealthy northeastern region that generates one-fifth of Spain’s economic output.

Just as the eurozone crisis has strained relations between wealthier nations of the north and heavily indebted countries to the south, Spain’s crisis has aggravated tensions between the central government and its self-governing regions.

Catalonia is broke and needs a €5 billion bailout from the central state to meet debt payments this year, but Catalans are convinced they bear an unfairly large share of the country’s tax burden.

More than half say they want independence from Spain, the highest level ever.

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