Spain's next PM: Very tough times lie ahead

December 19, 2011 — MADRID (AP) — Warning that very hard times lie ahead for Spain, the country's next prime minister said his incoming conservative government aims to reduce the country's deficit by €16.5 billion ($21.6 billion) next year.

In a keenly awaited speech to Parliament a month after being elected, Mariano Rajoy still did not specify what bitter cocktail of spending cuts and tax hikes might be used to get the deficit down to Spain's stated goal of 4.4 percent of GDP in 2012.

The deficit was 9.2 percent of GDP last year and estimated by the outgoing Socialist government to be about 6 percent this year — a figure Rajoy suggested may be too optimistic because the economy posted no growth in the third quarter. That stagnation prompted Spain, the IMF, the EU and many private economists to lower the country's growth estimate for this year from 1.3 percent to 0.8 percent.

Spain was in recession for nearly two years and posted only listless growth this year, and some economists expect its growth could turn negative again. Rajoy said Spain's staggering jobless rate had risen to around 23 percent overall and around 46 percent for people under 25.

"The panorama could not be more somber," Rajoy said. Spain's overall debt stands at €706.34 billion ($919.6 billion) as of the end of September, up 15 percent from a year ago. The new figure is about 66 percent of GDP and includes the substantial debt held by Spain's 17 semiautonomous regions.

Outlining his economic plans for the first time, Rajoy said he would end a freeze on cost-of-living adjustments for pensions but every other category of government spending would now subject to review.

Rajoy said by year's end, his government will approve an extension of the 2011 budget as a stopgap and then offer a full 2012 budget by the end of March. Except for security forces and positions in basic public services, he said government jobs that become vacant as people retire will not be filled.

Spain's opposition Socialist Party slammed Rajoy for providing few specifics on how he will cut government services to reduce the deficit or create jobs. But the Socialists will be able to do little to counter Rajoy's proposals, since his party won an absolute majority in the Nov. 20 election.

"He didn't explain how he's going to do it," said Jose Antonio Alonso, spokesman for the Socialists. "It was a disappointing speech ... it was ambiguous and it wasn't clear." Spanish stocks and bonds rose Monday in line with increases across Europe. The Madrid stock exchange was up 1.6 percent while borrowing costs for Spain's 10-year bond dropped 0.13 of a percentage point to 5.13 percent.

Spain's economy was upended after the 2008 credit crunch exposed a national real estate bubble. Now borrowing costs are rising for the eurozone's fourth-largest economy, and Spain is often cited along with Italy as troubled economies that might have to join Greece, Ireland and Portugal in accepting international help. But both Spain's and Italy's economies are each larger than those three smaller nations combined and considered too big for Europe's rescue fund to handle.

The Fitch Ratings agency warned last Friday it was considering downgrading the credit ratings of Spain, Italy and four other eurozone nations. Rajoy's Popular Party won the Nov. 20 elections by a landslide over the ruling Socialists. Rajoy will be voted in as premier on Tuesday, then formally take office Wednesday at the residence of King Juan Carlos.

Another key focus for the new premier will be labor market reforms designed to encourage hiring, such as changes to the way companies and unions negotiate collective bargaining accords. Rajoy said he has given Spain's main business federation and labor unions until mid-January to come up with their own reforms, otherwise the government will impose a plan.

"These reforms must be done as soon as possible," Rajoy told the 350-member Congress of Deputies, the lower chamber of Parliament. He also announced tax changes to help self-employed people and small and medium-size companies, and says banks heavily exposed to the burst real estate bubble need to get rid of thousands of unsold homes they hold. Rajoy said Spain is saddled with about 700,000 unsold new homes from the construction binge.

Rajoy also envisions further bank mergers — troubled savings banks in Spain have already fused from 45 to less than 20 over the past two years. Also, Rajoy endorsed a business leaders' proposal to boost productivity by moving most midday holidays to Monday — ending a cherished Spanish practice of creating four-day weekends when holidays fall on a Tuesday or Thursday.

Antonio Barroso, an analyst with Eurasia group, said Rajoy's measures addressed Spain's most pressing difficulties, such as unemployment and a vulnerable banking sector. Barroso said "controlling expenditure is the number one problem" but reducing the deficit and reforming public administration will be easier than restoring the health of the financial sector and tampering with labor entitlements.

He said tackling the problems of Spain's financial sector "is very complicated," adding that the Bank of Spain and the Popular Party are both split about the possibility of setting up a bad bank for toxic assets. Another possibility is establishing an asset protection scheme for financial institutions with bad property debts.

"The situation is very fluid," Barroso said of government solutions to the country's debt crisis.

Alan Clendenning in Madrid and Barry Hatton in Lisbon contributed to this report.