28th Oct 2016

Markets wary despite extra round of Spanish cuts

  • Madrid: the finance minister changed the subject when asked by press to rule out a bail-out (Photo: cuellar)

The EU has welcomed Spain's plan to cut another €10 billion off its yearly budget, but the measure failed to stop speculation the country could be next in line for a bail-out.

Olivier Bailly, a European Commission spokesman, on Tuesday (10 April) said Brussels "welcomes" the move because it "confirms both the Spanish government's determination to implement the necessary reforms, and furthermore the Spanish government's commitment to respect the 5.3 percent [of GDP] deficit [limit agreed] for 2012."

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He approved the move despite the fact the new cuts are mainly to hit education and healthcare.

The €10 billion savings are to come on top of €27 billion of cuts promised on 30 March. But Spain's financial credibility has taken a battering in recent months, with the new centre-right government of Prime Minister Mariano Rajoy forced to admit the country's economic situation is worse than previously thought.

Markets on Tuesday pushed the costs of 10-year Spanish bonds to almost 6 percent, prompting press to ask whether Madrid will need a Greek-type bail-out.

The country's economy minister, Luis de Guindos, when asked in Madrid on Tuesday morning if he could categorically rule out an international rescue package declined to answer the question.

Spanish central bank chief Miguel Ordonez in a separate press event said the European Central Bank has "never" discussed a Spanish rescue. But he added that Spain's economy is unlikely to see a recovery any time soon and that its banks might need an injection of public capital.

The new Spanish cuts are expected to see hikes in university fees for students and the imposition of healthcare charges for high-earners.

"Too much austerity as we have seen in Greece and in Portugal can undermine economic fundamentals and make it harder to meet fiscal targets. On the other hand, markets are demanding such confidence-building measures that aim to ensure debt sustainability and thus ultimately debt repayment," Thomas Herrmann, an economist at the Credit Suisse bank told EUobserver.

He added that some euro governments are facing a no-win situation in terms of market psychology.

"They're trying to pull new measures out of the box and the markets are reacting badly. If you come up with new measures, this can in itself be interpreted as meaning that you are admitting that you have a problem."

But with social unrest flaring up afresh in Greece, the mental state of city traders is not the only worry for policy-makers in EU capitals.

A home-made bomb using five gas canisters exploded outside the Administrative Reform Ministry in Athens on Monday in protest at the bureau's task of cutting tens of thousands of public sector jobs.

The Greek authorities played down the incident. But anonymous police sources told the Reuters news agency it could have caused injury because there was no warning and the building is in a busy area.

The attack comes after a 77-year-old pharmacist shot himself in central Athens on 4 April to protest what he said was his loss of dignity in the face of cuts.

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