Spain moves closer to bailout as government leaks planned pension cuts

Sources reveal Mariano Rajoy plans to save €4bn a year as part of strategy to pre-empt eurozone's conditions for help

Spain crept closer to a bailout as the government leaked plans to cut pension spending and senior bankers and business leaders called for the prime minister, Mariano Rajoy, not to postpone his decision too long.

Spain will cut up to €4bn (£3.2bn) of spending a year by freezing pensions and forcing workers to retire later, sources close to the government told Reuters.

The leak on Friday was part of a strategy by Rajoy's government to hurriedly put into place as many as possible of the changes that eurozone countries might demand before signing a bailout agreement with them. A new set of proposals will be announced next week, along with the budget for 2013.

Rajoy's centre-right government hopes this will allow Spain to sign a deal with fewer conditions imposed by Brussels, making the bailout easier to digest for ordinary Spaniards who are fed up with government austerity measures and soaring unemployment.

Greece, which is negotiating with the troika of the EU, European Central Bank (ECB) and International Monetary Fund (IMF), played down speculation that negotiations over its second bailout would be delayed until after the US elections.

Officials said talks were continuing and the Greek parliament would be given a full list of spending cuts and tax rises by next week.

Concerns that the €11.5bn of savings in Greece will be rejected by parliament were heightened this week when several senior ministers warned they would resign if plans for 50,000 public sector job cuts are included in the austerity package.

International bondholders, which have loaned peripheral eurozone countries hundreds of billions of euros, fear that delays over negotiations in Athens and Madrid will cause greater political instability and undermine efforts to reduce debts and push through changes.

On Thursday the head of one of Spain's biggest banks, BBVA boss Francisco González, called on the government to ask for the bailout as soon as possible.

The ECB announcement that it would buy bonds to drive down borrowing costs in Spain or any other country that agreed a bailout with the eurozone's rescue fund has already lowered bond yields, allowing Spain to continue financing itself on the markets – but at relatively high interest rates.

That has given Rajoy's government breathing space and some observers now expect him to wait for a bailout until after 21 October elections in the northern regions of Galicia and the Basque country.

Others believe he will act before the ratings agency Moody's decides this month whether to downgrade Spain's debt to junk status.

The head of Spain's employers' federation, Juan Rosell, also called for the government to act, but asked it to negotiate carefully and unhurriedly to make sure conditions were not stifling for the economy.

His organisation has already warned that Spain's economy, which is set to shrink 1.7% this year, will suffer the same sort of decline in 2013. As a double-dip recession drags on, unemployment will rise from 25% to 26.5%, it says.

The government reportedly hopes that it can reduce the impact of a bailout even further by asking eurozone countries to allow it to draw on a €100bn rescue package set aside for Spain's ailing banks.

The banks may take only half of that sum and the terms agreed with the European Financial Stability Facility allow for Spain to ask for whatever money is left to be used for something else. Terms might be agreed quickly and could allow the ECB to start buying Spanish bonds on the secondary market.


Giles Tremlett in Madrid and Phillip Inman

The GuardianTramp

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