Spain faces toughest budget of post-Franco era

Hours after a general strike, which burst into violence in places, Spain's right-leaning government unveils huge cuts on Friday in what may be the toughest budget of the post-Franco era. Hundreds of thousands of protesters swamped Spain's streets on Thursday to back the strike which was marred by clashes in Barcelona where youths set fire to a Starbucks coffee shop. Unions said nearly a million people took part in Madrid alone to denounce labour reforms, spending cuts and soaring unemployment in a country mired in recession. The interior ministry put turnout in Madrid at just 85,000. The difficulties encountered by Spain in correcting its public finances underscore the purpose of a meeting in Copenhagen of finance ministers from the eurozone on the size of a financial firewall. This firewall is intended to install confidence that adequate funds would be available to support weak eurozone countries encountering new debt strains, and thereby reduce the risk of a resurgence of acute tensions on financial markets. Spain, having overshot its public deficit target, is once again a focus of concerns among analysts about its ability to overcome its problems. The demonstrations, overwhelmingly peaceful in most of the country, erupted in violence in the centre of the northeastern city of Barcelona. Scuffles also broke out in Madrid. Police shot smoke cannisters and fired rubber bullets in Barcelona, television pictures showed, as a rubbish container burned in a city street. Prime Minister Mariano Rajoy has said he is determined to keep his promises to eurozone partners to slash the deficit, even at a time of soaring unemployment and recession. The Popular Party government must craft a 2012 budget to bring down the public deficit to the equivalent of 5.3 percent of economic output this year from 8.51 percent last year. That means at least 20-30 billion of euros ($26-40 billion) in austerity measures, on top of 8.9 billion euros in spending cuts and 6.3 billion euros in tax increases already announced this year. Spain needs to squeeze about 50 billion euros out of the budget if it is stand by its deficit-cutting targets and calm mounting concern in Europe and on financial markets, analysts say. The task is complicated by the recession, with the government predicting a 1.7-percent slump in economic output this year. "It will be about 50 billion euros, maybe even a bit more," said Soledad Pellon, analyst at the brokerage house IG Markets. Rating agency Moody's Investors Service estimates Spain must find 41.5 billion euros in spending cuts and revenue increases. The foundation of savings banks' thinktank Funcas puts the figure at 55 billion euros. Budget Minister Cristobal Montoro said the 2012 budget would be "the most austere since democracy" was introduced after the 1975 death of General Francisco Franco. "It needs a budgetary effort that up to now we have probably never made in our country," he added. Speaking in Copenhagen on Friday, Spanish Finance Minister Luis de Guindos said he was confident that the budget "would convince" Madrid's European partners. "We are bringing an explanation of the Spanish budget. This budget is based on a policy of austerity, which will be the springboard for an economic revival of the country," he told reporters.  Financial group Citi's chief economist Willem Buiter said Spain would likely need emergency help from international lenders this year to shore up its banks and public finances. "Spain looks likely to enter some form of a troika programme this year" to ensure access to favourable credit, he said, referring to the European Union, European Central Bank and International Monetary Fund. He tipped a 2.7-percent contraction this year in the Spanish economy and warned that debt may be higher than previously thought. "Sovereign debt restructuring is avoidable," the Citi economist wrote, but only with more radical fiscal and structural measures. Spain's government plans to freeze public sector workers' salaries and cut ministry budgets by some 15 percent but it has ruled out raising value-added tax that would hurt consumption. Analysts remain sceptical that Madrid will be able to meet its deficit target.  Jose Carlos Diez, analyst at Intermoney brokerage, said other countries had shown that reducing the deficit in a recession is difficult because it cuts government receipts and raises expenses for unemployment benefits. "Suddenly you are rowing against the current, with a capacity to row but in the end you tire out," he warned. "Spain needs more time but Brussels does not seem disposed to give it."