UPDATE 3-Spain to slash wages to cut deficit, unions angry

* Civil service wages cut by 5 pct in 2010

* Public investment to be cut by 6 bln euros

* Measures are tough but maybe not tough enough – analysts

(Updates with CCOO union, Rehn)

By Nigel Davies

MADRID, May 12 (BestGrowthStock) – Spain will cut wages of state
employees and slash investment spending, sparking union anger at
the government’s toughest moves yet to rein in a budget deficit
some feared could ignite a bigger version of the Greek crisis.

Prime Minister Jose Luis Rodriguez Zapatero’s fresh
austerity measures came days after a $1 trillion fund was
established to prop up weaker euro zone states and hours after
U.S. President Barack Obama pressed him to be “resolute” in
efforts to implement economic reforms. [ID:nN11663212]

“We need to make a singular, exceptional and extraordinary
effort to cut our public deficit and we must do so now that the
economy is beginning to recover,” Zapatero told parliament as he
detailed the cuts totalling 15 billion euros ($19.05 billion) in
2010 and 2011.

The cost of protecting Spanish government debt against
default fell immediately following the announcement to 141.5
basis points from 161 at the New York close on Tuesday, and U.S.
stock futures picked up on the news.

Civil service salaries will be cut by 5 percent in 2010 and
frozen in 2011, said Zapatero. The move was badly received by
unions which, while so far maintaining good relations with the
Socialist government, have already put the brakes on a
government move to raise the retirement age to 67 from 65.

“The proposed cuts merit outright rejection,” said Ignacio
Fernandez Toxo, leader of Spain’s biggest union confederation,
Comisiones Obreras, saying that he would not rule out any action
to protest against the measures.

But the leader of the second-largest labour grouping,
Candido Mendez of the Union General de Trabajadores, sounded a
more conciliatory note, saying that he still thought it possible
unions might agree to labour market reforms.

WILL UNIONS ACT?

Unions only represent about 16 percent of Spanish workers
and marches earlier this year against earlier austerity measures
were tiny in comparison with the mass fury unleashed by their
Greek equivalents. But Zapatero’s latest measures for the first
time directly target the unions’ main constituency — public
sector workers — which could put labour leaders, criticised by
some of their members for inaction, under pressure to take more
aggressive action.

The cuts, which follow an earlier 50 billion euros in
austerity measures which had failed to convince markets, also
include a reduction of more than 6 billion euros in public
investment.

They are intended to reduce the budget deficit to 9.3
percent of gross domestic product this year, from 11.2 percent
in 2009, 6 percent in 2011 and the 3 percent limit stipulated by
European rules by 2013.

“These measures go in the right direction,” said European
Economic and Monetary Affairs Commissioner Ollie Rehn.

But the leader of the conservative Popular Party opposition,
Mariano Rajoy, accused Zapatero of allowing government finances
to deteriorate to the point that Spain had to be pushed to act
by the European Union, reducing the country to a “protectorate”
of Brussels.

ZAPATERO SURPRISES

“These measures reinforce all (those) … taken over the
weekend in Brussels and are what the market was waiting for,
although not many people thought the prime minister would dare
to take them,” said Nicolas Lopez, of Madrid brokerage M&G
Valores.

But others warned that the cuts, however harsh, may not be
enough for Spain, whose public sector is coming under strain
from the huge debts accumulated by companies and households
during a property boom.

Unemployment has hit 20 percent, and economists already
doubt that Spain’s relatively uncompetitive economy will be able
to reach the levels of economic growth that underpin the
government’s deficit forecasts.

Data released on Wednesday showed the economy grew for the
first time in nearly two years in the first quarter, expanding
0.1 percent quarter on quarter.

“We feel that Spain is going to fall short of the
government’s latest growth projections of 1.8 percent in 2011,
2.9 percent in 2012 and 3.1 percent in 2013. This could imply
that even deeper spending cuts or steeper tax rises will be
required,” said Raj Badiani, of IHS Global Insight.

The measures were announced after European Union and
International Monetary Fund officials agreed at the weekend on a
$1 trillion emergency fund for weak euro zone countries that
have been hit by debt crises.

The decision to establish the emergency fund was squarely
directed at Spain and Portugal, seen as the next two weak links
in the euro zone after Greece, to come up with fast and credible
measures to reduce their budget deficits.

“After the weekend EU meeting it became very clear Spain
and Portugal, and particularly Spain, would have to go the extra
mile in cutting the deficit,” said Jose Garcia Zarate, an
economist at 4Cast. “So they have done this, based on the Irish
model.”

Portugal also unveiled extra fiscal measures over the
weekend, including putting on ice the building of a new airport
in Lisbon.

For a factbox detailing the austerity plans, click on
[ID:nLDE64B14P])

Investing Research

(Writing by Axel Bugge)

(Reporting by Elisabeth O’Leary and Martin Roberts; editing
by Jason Webb, John Stonestreet)

UPDATE 3-Spain to slash wages to cut deficit, unions angry