Eurozone crisis: Spain inching closer to a meltdown, Day of rage in Greece as more stringent cuts loom

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

SPAIN -In public, Rajoy has been resisting calls from bankers at home and the leaders of France and Italy to move quickly to request assistance, but behind the scenes he is putting together the pieces to meet the stringent conditions for aid.

With protesters stepping up anti-austerity demonstrations, Rajoy presents painful economic reforms and a tough 2013 budget on Thursday, aiming to persuade euro zone partners and investors that Spain is doing its deficit-cutting homework despite a recession and 25 percent unemployment.

Figures released on Tuesday suggested Spain will miss its public deficit target of 6.3 percent of gross domestic product this year, and on Wednesday the central bank said the economy continued to contract sharply in the third quarter.

By pre-empting reforms demanded by Brussels — such as creating an independent fiscal auditor — Rajoy hopes to sell them to voters as home-grown rather than imposed from outside.

Diplomats reported intense last-minute pressure on Madrid on Wednesday from key euro zone policymakers to take tougher measures, notably on freezing pensions.

On Friday, 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 euro ($130 billion) aid package that Europe has already approved for the banks.

A STEP CLOSER

Rajoy is gradually shedding his reluctance to seek a sovereign bailout for the euro zone’s fourth biggest economy – a condition for European Central Bank intervention to cut his country’s borrowing costs.

He suggested in an interview published on Wednesday that he would make the move if debt financing costs remained too high for too long.

“I can assure you 100 percent that I would ask for this bailout,” he told the Wall Street Journal, 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 euros this year.

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

The interview, the central bank’s warning on the third quarter and other factors drove up Spain’s borrowing costs, with the yield on the benchmark 10-year bond jumping to 6 percent on Wednesday, a level seen as unsustainable in the medium term.

The blue-chip index of leading stocks fell 3.46 percent to a two-week low, with heavyweight banks BBVA and Santander leading the way.

Markets were also reacting to a letter from Germany, Finland and the Netherlands on Tuesday that implied that rescue funds Spain receives for its banks will remain on its public debt. The three said any future direct recapitalization of banks by the euro zone’s bailout fund should not cover “legacy” problems.

CATALONIA INDEPENDENCE MOVEMENT

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

Just as the euro zone 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 needs a 5 billion euros 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.

Artur Mas, the conservative president of Catalonia, announced on Tuesday he would hold early elections in November after Rajoy rejected his call for more tax autonomy. Mas’s Convergence and Union, or CiU, party is likely to win an absolute majority in the regional parliament, which he can use to battle Rajoy over spending cuts.

On Wednesday Mas took things further, saying Catalonia should also hold a referendum on independence, which the central government says would be unconstitutional.

Although an independent Catalonia is a remote possibility, the political instability sends a worrying message to investors. Rajoy’s People’s Party has threatened to take control of the budgets of regions that fail to meet deficit reduction targets despite Catalonia already having made tough austerity measures.

Analysts said Mas, who until recently expressed more moderate aims for Catalan autonomy, was playing a dangerous game.

“In the short term it’s not going to help in any way, it’s going to increase, if this is at all possible, the lack of confidence in the future of Spain,” said Javier Diaz-Gimenez, professor of economics at IESE.

COMMUNICATION PROBLEMS

Anti-austerity groups planned a fresh demonstration on Wednesday evening in Madrid, a day after police fired rubber bullets at thousands of protesters who tried to form a human chain around the parliament building.

Police arrested 35 protesters on Tuesday and 64 police and demonstrators were injured in the clashes.

The relatively small but intense protests this week have added to Rajoy’s image problems abroad.

Officials in Brussels and Berlin have accused him of failing to sell his reforms effectively, partly because of confusing messages from his separate treasury and economy ministers and from his own office.

“The problem in the structure of his economic cabinet is transmitting a confused, improvised image,” said an economist, who did not want to be named and who said Rajoy will have to name a powerful economic deputy by the end of the year to sort out his communications issues.

The governments of Ireland, Portugal and Greece were all voted out of office after they sought bailouts from Europe.

But Rajoy may have more staying power, especially if he negotiates a bailout “lite”, such as a precautionary credit line from the European bailout fund that would not involve taking Spain out of the credit markets.

The uncharismatic conservative has more than three years left to his term and his People’s Party has firm control of parliament, with no signs so far of party splits that might force him out early. Reuters

With wages, pensions and healthcare under threat, protesters flood the streets of Athens

GREECE –  Police fired stun grenades and tear gas at protesters yesterday as tens of thousands poured into the streets of Athens as part of a nationwide strike to challenge a new round of austerity measures that are expected to cut wages, pensions and healthcare once again.

Dozens of youths, some masking their faces with helmets and T-shirts, hurled Molotov cocktails and rocks at police who fired back in an effort to scatter the angry crowds around the parliament building. More than 50,000 people are believed to have participated in the mass walk-out in Athens alone.

Hospital doctors, pensioners, teachers and shopkeepers were among the demonstrators that participated in over 60 rallies throughout the debt-ridden country. Even the president of Greece’s police officers participated in the trade union march in Athens alongside uniformed colleagues from the fire department and coastguard.

“We don’t owe [money] to anyone, bring back what’s stolen,” was one of the chants that could be heard in Athens, echoing the violent resentment of many Greeks against politicians and their purported embroilment in tax evasion and corruption scandals.

Evangelos Meimarakis, the Parliament Speaker and previous conservative New Democracy minister, temporarily suspended his duties earlier this week after allegations of money laundering. The Finance Ministry’s Fraud squad is investigating at least 30 politicians and public workers for possible corruption charges, including two other former conservative ministers. All three former ministers deny the accusations.

Meanwhile, the government has been negotiating with its political allies and international lenders to hammer out a minimum of €11.6bn (£9.2bn) worth of cuts mainly drawn from pensions and wages. Cuts in healthcare and defence are also planned. But delays in agreeing over the exact nature of the cuts is holding up the disbursement of a critical €31.5bn (£25bn) loan instalment that will help Greece stay afloat and inject cash into the economy.

A Finance Ministry official told The Independent that €23.5bn (£18.7bn) of the anticipated tranche has been earmarked to recapitalise banks that have been unable to approve loans, paralysing the system. Part of the rest will also be used to repay some of the state’s debt to private contractors and other organisations.

Giorgos Loukas, a former electrician, said austerity measures had reduced his monthly pension from €1,100 (£875) to €750 (£600) . “We’re being stripped of everything we have,” the 66-year old said. Both his wife and daughter are unemployed, and all three survive on his income. “Where is European solidarity? We’re being insulted as a nation but I will never beg at soup-kitchens for food – my dignity is all I have left.”

Greece has been told to implement a succession of spending cuts and structural reforms in an effort to bring down its massive debt in exchange a bailout of nearly €200bn (£160bn). But many experts warn that the measures are only making the recession deeper. One in two youths is out of a job while thousands of educated and skilled professionals are fleeing the country in search of opportunities abroad.

“I feel my country is on auction and we’re just an economic experiment,” said Dimitris Palles, 49, a physics researcher at the National Hellenic Research Foundation. Mr Palles, 49, who’s seen his annual salary drop from €24,000 (£19,000) to €19,500 (£15,500). “No level of political mismanagement can justify the pain we’re being asked to endure,” he says.

Greece’s international creditors were also reported to be loggerheads yesterday over how to solve Athens’ debt crisis, as the International Monetary Fund (IMF) demanded that European governments write off some of the Greek debt they hold. According to Reuters, tensions between Greece and the “troika” of European Union, European Central Bank and IMF have escalated as the IMF pushes to restructure Greek debts to public-sector foreign creditors, whereas EU leaders would rather give Athens more time to meet the demands of its bailout.

Public healthcare is one of the sectors that has been gravely affected by the crisis in Greece. Chemists and pharmaceutical companies have stopped giving drugs on credit to medical insurers saying they haven’t been paid in months by the state.

Meanwhile, Greece’s power company cut the electricity at a kidney hospital on the island of Aegina for several hours on Tuesday while the patients were undergoing blood dialysis, forcing the centre to rely on its generator.

ECONOMY FEARS SEND SPAIN’S RATES SOARING

Concern about the Spanish economy drove a sharp rise in the interest rates that investors charge to lend money to Madrid yesterday, increasing fears that eurozone crisis was worsening

The yield on the country’s 10-year bonds topped 6 per cent for the first time since early this month, reviving speculation that Madrid would have to seek a national bailout from its European partners.

The high rates come in a crucial week for the Spanish economy, with the government due to unveil its draft budget for 2013 today, and an audit of Spain’s banks expected to reveal how much money will be needed to prop up the country’s ailing lenders on Friday. –Independent

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