Spain Unveils Austerity Budget as Bailout Looms

Squeezed by financial markets and denounced in the streets, Spain's government will adopt on Thursday a 2013 austerity budget which could be a precursor to a full-blown bailout.

The final step before a rescue is likely to come a day later, analysts say, when Madrid unveils an independent audit of its limping banks to determine how much capital they need.

Spain's eurozone partners have agreed to provide a rescue loan of up to 100 billion euros ($125 billion) to help the banks recover from bad loans built up after a 2008 property crash.

But Madrid insists 60 billion euros will be enough.

Once that matter is dealt with, the eurozone's fourth-largest economy will have all the data it requires to seek a broader, sovereign rescue from the eurzone's bailout funds.

If Spain bends to the will of the markets and some of its eurozone partners by formally requesting the bailout, it would trigger a bond-buying programme for troubled states outlined by the European Central Bank on September 6.

That would have the effect of curbing Spain's borrowing costs.

Before making the leap, however, Prime Minister Mariano Rajoy wants to know what the conditions would be.

The conservative leader likely wanted to make progress on the budget for next year, also, before making the request.

The basic outline for the budget has been known since July: the plan to be adopted by the cabinet on Thursday is expected to enact spending cuts and tax increases worth a combined 39 billion euros.

The government aims to claw back a total of more than 150 billion euros between 2012 and 2014: 62 billion euros this year, 39 billion euros next year and 50 billion euros in 2014.

On the austerity menu for 2013: an increase in sales tax and other taxes is expected to rake in 15 billion euros and nearly seven billion euros will be found from cuts in the regions, which manage health and education.

Other savings come from lowering unemployment benefits and social assistance, as well as a freeze in public sector hiring.

But Spain will probably have to go further, said Juan Ignacio Conde Ruiz, deputy director of the Foundation of Applied Economic Studies (FEDEA).

"To be credible with the markets, which is the government's ultimate goal, it would seem hard to avoid touching retirement pensions, which account for 25 percent of total spending," he said.

Rajoy's election campaign promise to maintain pensions by inflation would cost 3.0-3.5 billion euros, Conde Ruiz said.

-- "There won't be the means to do it" --

That, he said, would make it impossible for Spain to meet its commitment to slash the public deficit to 6.3 percent of gross domestic product this year from a runaway 8.9 percent last year.

"There won't be the means to do it," added Jesus Castillo, southern European specialist at French bank Natixis. "So we should not be surprised by a freeze in pensions," he said, or even a cut so as to stay on track with the 2013 target of a deficit equal to 4.5 percent.

Despite the analysts' doubts, Spain's Popular Party government insists pensions are going up, not down, as it faces growing protests to the austerity measures including hundreds taking to Madrid's streets Tuesday.

Deputy Prime Minister Soraya Saenz de Santamaria said the new level for pensions would be decided in November.

"Will pensions go up? Yes, pensions are going to go up. Pensions will obviously be adjusted for the cost of living," she said.

At the Spanish investment bank Inversis, analysts predict the public deficit forecasts will be revised higher for 2012 and 2013 in line with a deeper than expected recession.

On Thursday, a new package of reforms negotiated with Brussels to stimulate business activity and exports also will be announced, "which could be the stage prior to a bailout request", said a report by Spanish brokerage Renta4.

If Spain fails to take convincing action, the verdict could come quickly.

Moody's Investors Service has until Sunday to decide whether to downgrade Spain's debt after a review. If it does so, it could be the first agency to rate the nation's debt at the equivalent of a junk bond.

Spain's hesitation before seeking a rescue could be "highly risky", European Competition Commissioner Joaquin Almunia warned on Monday in an interview with AFP.

The country's budget and economic reform announcements on Thursday are aimed at addressing just those concerns, said Conde Ruiz.

"The idea is to anticipate the conditions the aid would impose, and thus to introduce them now in the budget," he said, adding that this would ease the political sting.