Spain's new prime minister pledges €16bn spending cuts

• The panorama could not be more sombre, says Mariano Rajoy
• Banks will be forced to admit property losses in full

Spain's new prime minister, Mariano Rajoy, pledged public spending cuts of at least €16.5bn (£13.8bn) today and said he would force the country's banks to own up to the full scale of losses on bad property loans.

Economists have warned that cuts would damage the prospects of an immediate return to growth in a country already burdened by massive unemployment, while ambitious reforms of the labour market and finance sector would take time to produce results.

Speaking to the parliament before he is formally voted in on Tuesday, Rajoy said that Spainhad no option but to embrace austerity and meet deficit targets set by the EU. In recent weeks the country's borrowing costs have soared dangerously close to a level that would force the country to seek an international bailout.

"The panorama could not be more sombre," he said. "We cannot be vague when setting out priorities."

Rajoy did not specify where the spending cuts would come from, but said much civil service recruitment would be frozen. He also proposed a drastic reduction in the number of state companies, quangos and other entities.

Rajoy admitted there was a worrying hole in the Spanish banking system with "latent and hidden losses" left by a burst housing bubble. The new government would oblige banks to reveal the full extent of toxic real estate assets, valuing land and properties they have received from bankrupt builders at realistic prices.

"There are still serious doubts about their balance sheets," he said. "We must clear up doubts about the value of certain assets, especially in real estate, which make access to the markets for the financial sector more difficult and also damage the credibility of our public debt."

Banks would be encouraged to sell off their growing property portfolios, a move that threatens to flood the market and drive down house prices. The property collapse has already left 750,000 newly built homes unsold.

He remained unclear, however, as to whether he favoured a state-backed "bad bank" to mop up all the toxic assets, or whether some banks might have their most toxic assets split off into individual bad banks.

A restructuring of the finance sector would probably involve a further round of consolidation. Restructuring would be completed by the summer, Rajoy said.

Unions and employers were told to agree on radical labour reform, otherwise a Rajoy government would legislate in the first quarter of next year. The aim is to make collective bargaining more flexible and reduce the cost of hiring and firing.

Rajoy won a landslide election victory on November 20, with his conservative People's Party (PP) ousting outgoing prime minister José Luis Rodríguez Zapatero's socialists to win an absolute majority in parliament.

After his formal voting in as prime minister by parliament on Tuesday, a key appointment to be made public on Wednesday will be the new finance minister, whose name Rajoy has kept secret.

That minister will have to oversee the €16.5bn in spending cuts, which will be increased if, as seems likely, the outgoing socialist government has failed to bring the deficit down to this year's target of 6%.

Some analysts expect the deficit to be 7%, which would require €10bn extra in cuts to reach next year's target. A potential decline in tax revenue could force even more cuts if Rajoy sticks to his plan not to raise key taxes.

He announced small tax changes designed to favour small businesses and create employment. A move to imitate the British system of having public holidays on Mondays aims to improve productivity.

The only other winners from Rajoy's speech were the elderly, whose pensions would rise with inflation next year. "And that is the only bit of spending that will be increased," he said.


Giles Tremlett, Madrid

The GuardianTramp

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