Eurozone crisis: Spain inching closer to a meltdown

September 27, 2012 – SPAIN – 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. 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. 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. –Reuters