Spain to pass reforms, budget cuts with eye on aid

Spain will announce a series of economic reforms and a tight 2013 budget on Thursday, aiming to avoid the political humiliation of having Brussels impose conditions on a request for an international bailout.

Prime Minister Mariano Rajoy will enact further cutbacks as his efforts to bring down one of the euro zone's largest public deficits have been undermined by falling tax revenues in a recession.

"We know what we have to do, and since we know it, we're doing it," Rajoy said in a speech in New York on Wednesday.

"We also know this entails a lot of sacrifices distributed ... evenly throughout the Spanish society," Rajoy said in an address to the Americas Society.

Thousands of anti-austerity demonstrators demanding that Rajoy resign gathered for a second night on Wednesday in Madrid near the national parliament, which was guarded by hundreds of police.

Reforms intended to win over sceptical investors and control spending are likely to include a new tax oversight body as recommended by Brussels, limitations on early retirement, new taxes on greenhouse emissions and stock transactions and eliminating some tax exemptions.

Wage freezes for public servants will also be extended into 2013, trade union sources said.

Spain is negotiating the terms of a European aid package that would trigger a European Central Bank bond-buying programme and ease Madrid's unsustainable borrowing costs. The reforms to be announced on Thursday are meant to pre-empt the conditions that would be attached to the aid.

Uncertainty over the timing of the aid request and divisions within the European Union over a plan to create a banking union sent the interest rate on Spain's benchmark 10-year bond above 6 percent on Wednesday for the first time since ECB President Mario Draghi announced the plan in early September.

Spain, the euro zone's fourth largest economy, is at the centre of the crisis, and investors fear that Madrid cannot control its finances and that Rajoy does not have the political will to take unpopular measures.

Figures released on Tuesday suggested Spain will miss its public deficit target of 6.3 percent of gross domestic product this year, and on Wednesday the central bank said the economy continued to contract sharply in the third quarter.

Critics say Rajoy's measures lack substance and fail to outline convincingly how they will raise the necessary cash.

"On paper they can make it all add up, but it will be hard to make the budget credible given all the reasonable doubts on the deficit target. It will be really tough to make the markets buy it," said a member of parliament for the ruling party, who asked not to be named.