Tense Times in Madrid: Spain Awaits Cash Injection As Reforms Fall Short

Spain needs to make significant spending cuts and see a major boost in state revenues -- but its most recent reforms apparently fall short by some nine billion euros. As tensions rise, the countrystillawaits the approval of 100 billion euros in emergency aid.

Will Spanish spending cuts and cash injections be enough to keep the economy afloat? Zoom
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Will Spanish spending cuts and cash injections be enough to keep the economy afloat?

Spain is tinkering with a comprehensive reform package to help the deeply indebted country get itself out of a severe financial crisis. But its new belt-tightening measures will apparently only go so far -- bringing in almost €9 billion ($11 billion) less than what had been announced.

The program presented last week envisions savings of €56.4 billion over the next two and a half years, according to a report published Saturday on the website of Spain's leading daily, El Pais. Citing government sources, the paper said that roughly €29 billion of this would come from tax increases and some €27 billion from spending cutbacks.

But on Wednesday, Prime Minister Mariano Rajoy had held out the prospect that tax increases and cuts in spending could inject €65 billion into empty state coffers. The El Pais report states that the €8.6-billion difference in these figures could come from other savings measures, such as the new energy-sector taxes announced this month.

Spain's Ministry of Finance initially declined to comment on the report. As of Friday, it still wasn't willing to release a more detailed breakdown of the reform measures.

Spain must reduce its budget deficit by €65 billion if it hopes to get it under the European Union's upper limit of 2.8 percent by the end of 2014. The country is already grappling with its ailing banks, unemployment of nearly 25 percent and the consequences of a real-estate bubble collapse. But now it must also struggle to push through these reforms and regain the confidence of the EU and the financial markets.

Four Cash Injections and a 'Bad Bank'

Spain's belt-tightening measures will soon be supplemented by money from EU coffers, though. On June 9, the finance ministers of the 17 euro-zone countries agreed to lend the Spanish government €100 billion to help its troubled banks. According to a confidential proposal of the leaders of the temporary euro rescue fund, the European Financial Stability Facility (EFSF), obtained by SPIEGEL, the funds will come from the temporary euro rescue fund in four tranches. Plans call for the first of these, worth €30 billion, to be in Spain already by the end of July.

Two-thirds of the funds in this initial tranche will be made available to ailing credit institutions than might need short-term capital injections. The remaining €10 billion will serve as what the document describes as a longer-term safety buffer. The document states that plans call for the three other tranches, each worth €15 billion, to come in mid-November and late December 2012, as well as at the end of June 2013.

The document adds that plans also call for a "bad bank" to be set up in late November to handle problematic assets. Up to €25 billion will reportedly be made available to the new institution.

The aid program for Spain will reportedly run until 2028, at the latest. The EFSF document states that, in order to ensure that Spain continues to have access to the financial markets, the rescue funds will not be calculated as part of the country's overall debt burden.

Contingent on State Approvals

The legally binding loan agreement will only be approved at a further Euro Group meeting on July 20. But before the loans can be made, national governments or parliaments must first approve it, including the German parliament, the Bundestag, which will vote on the matter in a special sitting on Thursday.

In an interview with the German public broadcaster ZDF aired on Sunday night, German Chancellor Angela Merkel said she was confident of getting the simple majority of parliamentary votes needed to approve the Spanish aid package. "We always get the majority we need," she stated.

At the same time, Merkel reiterated her position that German support for efforts to help troubled euro-zone countries was contingent upon their taking tough austerity measures and agreeing to close European monitoring from a new oversight body agreed upon in recent weeks. "All attempts … to say 'oh, let's practice solidarity and nonetheless have no supervision and no conditions' will stand no chance with me or with Germany," Merkel said.

Despite her confidence, Merkel still faces opposition within the ranks of her own conservative Christian Democratic Union (CDU) and its Bavarian sister party, the Christian Social Union (CSU). In late June, she needed support from opposition parties to win parliamentary approval of two key pillars of her efforts to calm the euro storm: the fiscal pact, which commits countries to stricter budgetary rules, and the European Stability Mechanism (ESM), the €700-billion permanent bailout fund designed to replace the EFSF.

Widespread Resistance

However, a recent SPIEGEL ONLINE survey revealed that a narrow majority of Germans are opposed to any more bailouts. Indeed, among respondents who support the CDU and CSU, 52 percent said it was almost pointless for Germany to continue fighting for the single currency.

Perhaps the chancellor's biggest headache, however, comes from her conservative allies in Bavaria. Horst Seehofer, the state's governor and head of the CSU, warned in an interview in early July with the newsmagazine Stern that "at some point we will reach a point where the Bavarian state government and the CSU will no longer be able to say yes." He added: "And without the votes of the CSU, the coalition no longer has a majority."

Merkel also has another hurdle to surmount. Although plans had called for the ESM to succeed the EFSF on July 1, this has been blocked by a temporary injunction imposed by the German Federal Constitutional Court. The court is hearing a case brought by plaintiffs who argue the ESM and fiscal pact will force Germany to give up too much sovereignty and undermine the power of its democratically elected parliament to determine what happens with taxpayers' money.

On Monday, the court announced that it will publish its ruling on the measures on Sept. 12. The long delay threatens to become what some have dubbed an "endurance test" for the euro.

jtw -- with wire reports

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