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Rajoy inches toward aid as protests, regions seethe | THE JEENYUS CORNER


Julien Toyer and Fiona Ortiz

Violent protests in Madrid and growing talk of secession in wealthy Catalonia are piling pressure on Spanish Prime Minister Mariano Rajoy as he moves closer to asking Europe for rescue money.

Rajoy has been resisting calls from influential domestic bankers and the leaders of France and Italy to move quickly to request assistance, but a series of events this week will drive him closer.

With protesters stepping up anti-austerity demonstrations, Rajoy presents more 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.

Fresh data on Tuesday suggested Spain will miss its public deficit target of 6.3 percent of gross domestic product this year, as the central government deficit reached 4.77 percent at the end of August, already higher than the year-end target.

By front-loading the reforms Rajoy hopes to sell them to voters as home-grown rather than conditions imposed from outside. Diplomats reported intense last-minute pressure on Madrid 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 ($129.62 billion) aid package that Europe has already approved for the euro zone’s fourth biggest economy.

Spain’s reluctance to seek a sovereign bailout – a condition for European Central Bank intervention to cut the country’s borrowing costs – could propel the euro zone into deeper trouble.

Rajoy moved one step closer to requesting aid, suggesting in an interview with the Wall Street Journal 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 newspaper, 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.

His comments helped drive the premium investors demand to hold 10-year Spanish debt rather than benchmark German bonds up to 445 basis points on Wednesday, the highest level since early September.

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