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Spain braces for austerity budget to avoid full bailout
Mariano Rajoy, the Spanish Prime Minister, has stressed he is committed to fiscal and structural reforms, saying that all segments of Spanish society will need to make sacrifices.
"We know what we have to do, and since we know it, we're doing it," he said in a speech in New York on Wednesday as violent protests engulfed Madrid for a second day in a new round of anti-austerity demonstrations.
European markets, which dropped sharply on Wednesday on increased fears for Spain and the euro crisis, edged higher on Thursday.
Mr Rajor is expected to unveil plans that go some way addressing reforms requested by the EU and win over sceptical investors. Investors fear that Spain, the eurozone's fourth largest economy and now at centre of the debt crisis, cannot control its finances and that Mr Rajoy does not have the political will to take unpopular measures.
The reforms are likely to include a new tax oversight body as recommended by Brussels, restrictions on early retirement, and new taxes on emissions and share deals. Wage freezes for public servants will also be extended into 2013, trade union sources claim.
However, his attempts to cut the country's debt and reduce its deficit are hampered by public anger, falling tax revenues and a shrinking economy - The Bank of Spain said on Wednesday the economy had shrunk at a "significant rate" in the third quarter, with all major indicators deteriorating.
Worries over Spain's economy triggered a steep sell-off in stock markets yesterday and pushed borrowing costs back toward "danger" levels, with 10-year bond yields rising above 6pc.
Mr Rajoy has been reluctant to ask for aid and said in the US that he will not request a full sovereign bail-out unless borrowing costs go "too high, for too long".
Spain is negotiating the terms of a European aid package that would trigger a European Central Bank bond-buying programme and ease Madrid's unsustainable borrowing costs. The reforms to be announced on Thursday are meant to pre-empt the conditions that would be attached to the aid.
However, protests against cutbacks make it more difficult for the Prime Minister to request aid - a condition for Spain to receive support from the European Central Bank - or to implement austerity measures.
Sweeping tax hikes and spending cuts introduced in July mean the government has little room to manoeuvre.
On Thursday, the FTSE 100 rose 0.4pc in early trading, after dropping 1.4pc yesterday.
Germany's DAX, France's CAC, Italy's MIB and Spain's IBEX added 0.6pc, 0.8pc, 0.3pc and 0.4pc respectively. On Wedneday they fell 1.8pc, 2.5pc 3.3pc and 3.7pc.
[Source: The Telegraph, London, 27Sep12]
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