Spain vows to press ahead with reforms

Mariano Rajoy, prime minister, announced €15bn of emergency deficit-cutting measures last Friday

Mariano Rajoy, the centre-right prime minister who took power in Spain last month, has responded to Friday’s credit downgrade from Standard & Poor’s by saying that his government will persevere with austerity and economic reforms, cutting the budget deficit, modernising labour laws and restructuring the banking sector.

“We live in difficult times, but the government I run knows exactly what it has to do to improve Spain’s reputation, to promote growth and create employment, and we will do it,” Mr Rajoy said at a Popular party meeting in Málaga in southern Spain at the weekend.

Mr Rajoy – who meets Nicolas Sarkozy, French president, in Madrid on Monday, and will also see Angela Merkel, German chancellor, before a European summit at the end of the month – reaffirmed that his government would oblige Spain’s 17 regional governments to tighten their belts after they were blamed for most of the overshoot on the 2011 budget deficit target.

Spain had agreed with the European Union to limit its overall deficit to 6 per cent of gross domestic product last year, but the PP says the actual deficit will exceed 8 per cent of GDP, making it harder to reach the 4.4 per cent of GDP target for this year.

PP ministers have already introduced tax rises and public spending cuts worth €15bn and are expected to announce a further €25bn of austerity measures to bring the deficit into line.

However, Alfredo Pérez Rubalcaba, the Socialist candidate who lost the November general election and is seeking to succeed José Luis Rodríguez Zapatero as party leader, said at the weekend that the deficit targets were impossible to meet.

“We have an adjustment path agreed that is proving impossible to fulfil, not just for Spain but for European countries in general,” said Mr Rubalcaba, who was part of a government that only weeks ago was promising to meet the deficit targets. “One can’t just cut back, there also have to be incentives to help the economy grow,” he said.

Mr Rajoy, meanwhile, confirmed that his government planned to oblige Spanish banks to clean up their balance sheets without recourse to taxpayers’ money, by increasing bad loan provisions for property out of their own resources or by merging with other banks.

“If a piece of land is worth €100, it can’t appear in the balance sheet valued at €1,000,” he said. “Transparency, clean-ups, and assets booked at their true value: we want more mergers, and we need a number of institutions of a size that generates credibility and respect.”