Spain will stick to harsh austerity measures until it emerges from its financial crisis, Prime Minister Mariano Rajoy said today, promising that the country would survive the present economic turmoil.
He acknowledged that the country is experiencing turbulence, but insisted: “We are not at the edge of a precipice, we will not sink.”
The government has “the will to persevere in this line for as long as is necessary”, he said.
Spain, where unemployment stands at a eurozone high of 24.4%, has imposed spending cuts and tax hikes to escape a crisis many fear could eventually swallow other countries using the European single currency.
Mr Rajoy said today that he supported the creation of a single European fiscal authority to uphold the credibility of the euro, and acknowledged that for this to happen it would be necessary for member states to “surrender more of their fiscal autonomy”.
He said that while it was possible Spain could have lived beyond its means, it was also true that those who are now criticising Spain – a reference to Germany - had also lent it money at very cheap rates.
German Chancellor Angela Merkel has long maintained that austerity is the most important step toward easing the eurozone debt crisis; however, the leaders of some of those countries hardest hit – faced with anti-austerity demonstrations that have at times turned violent – have also called for steps to be taken to try to boost employment.
Newly-elected French President Francois Hollande has also warned against too much of the belt-tightening that Mrs Merkel advocates for fear it could unleash political chaos.
Demonstrations against austerity measures in Greece frequently turn violent, and Spanish police baton-charged striking coal miners marching in Madrid on Thursday after a group started throwing stones and bottles. Police said two people were arrested and nine were slightly hurt.
Despite months of painful austerity reforms by Mr Rajoy’s conservative government, there is growing concern that its leaders have not done enough and Spanish banks may need to be saved from loans gone bad and foreclosures of property now worth far less than the loans paid out for it.
The country’s banking sector is laden with soured investments on real estate and the government recently needed 19 billion euros (£15.3 billion) to rescue just one bank, Bankia.
Some estimates have put a complete Spanish banking sector bailout cost at between €50bn and €150bn, but Spain only has €5bn left in the €19bn bailout fund it established in 2009.
Spain’s banking sector, however, is not the sole issue. The economy is mired in its second recession in three years and is forecast to contract 1.7% for the year.
This means the country has to raise money in bond markets and the interest rate on Spanish 10-year bonds finished trading at 6.47% yesterday, as reported by financial data provider FactSet.
A rate of 7% is considered unsustainable in the long run. Countries such as Ireland, Greece and Portugal that have faced such rates have had to be bailed out.
Spain’s current banking problems have startling similarities with Ireland. Both countries witnessed unprecedented property building and buying sprees enabled by their 1999 entry into the euro.
It was an entry that many economists say was partly responsible for both countries’ present problems – by entering into the single currency with more stable economies their credit-risk profiles were lowered giving their banks unprecedented access to international loans at rock-bottom rates.