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Saturday, March 31, 2012 1:35 AM

Violence, Firebombings Erupt as Spain Announces €27 Billion Deficit-Cutting Plan; Spanish Economy Will Implode; Spain Headed for Bond Revolt and Bailouts

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My friend Bran who lives in Spain writes ...

Hello Mish

Here are thoughts from the last couple of days on the strikes, protests, and violence in the wake of more austerity plans by Prime Minister Mariano Rajoy.

Pro-government news played down the strike to a virtual non-event, giving much criticism of the unions methods and exaggerations. Reality however, is that there is enough support by strikers to shape future politics, especially as austerity starts to bite.

The unions have promised to step up protests. The Indignado 15 Million Movement also protested, but separately from the unions.

One comment stuck out - German Chancellor Angela Merkel said the protests did not represent Spain. Maybe she was trying to be reassuring, but she is taking sides against maybe a million or so people of a foreign population, not very wise at best and otherwise agitating.
Spain Announces €27 Billion Deficit-Cutting Plan

MarketWatch reports Spain Announces €27 Billion Deficit-Cutting Plan
The Spanish government on Friday delivered what it called the biggest fiscal adjustment in the country’s democratic history, unveiling a 27 billion euro ($36 billion) deficit-reduction plan that includes sharp spending cuts across government ministries and higher taxes for corporations.

With images of nationwide demonstrations and strikes against labor reforms still fresh, the weight of the budget appeared to fall on big companies and government spending. Labor unions said nearly 1 million took part in Madrid’s rally alone Thursday evening.

Corporations will be asked to pay higher taxes this year, and their tax breaks will be reduced while the government said value-added-taxes would not rise. It said tax receipts for VAT would fall 2.6% as a result of weak growth in Spain.

Budget Minister Cristobal Montoro said all ministries would need to reduce their budgets by around 17% this year, which was slightly higher than expected, saving a total of up to €65.8 billion. Salaries for public workers will not be reduced, but will be frozen this year.

Electricity prices will rise 7%, to pay off a €24 billion electricity-tariff deficit that accumulated due to the difference between consumer prices set by the state and producer’s costs. Tariffs paid by electricity companies will rise 5%.
Austerity Measures Prompt Spanish Workers To Strike

NPR reports Austerity Measures Prompt Spanish Workers To Strike
Workers walked off the job in Spain on Thursday, halting public transport, closing schools and leaving hospitals with emergency staff only. The general strike was called by unions in response to the conservative government's labor reforms, which let companies opt out of collective bargaining agreements and fire workers more cheaply. But more punishing austerity could still be to come, as Spain tries to whittle down its budget deficit under pressure from Brussels.
Violence Erupts in Spanish Strikes

The Washington Post has a nice 19-image slideshow Violence Erupts in Spanish Strikes. Here are a few images.

March 29, 2012
A demonstrator throws stones next to a burning Starbucks, which was stormed by demonstrators during clashes with police at the general strike in Barcelona. Spanish workers livid over labor reforms they see as flagrantly pro-business staged a nationwide strike Thursday and tried to bring the country to a halt by blocking traffic, closing factories and clashing with police in rowdy demonstrations.
Emilio Morenatti / AP

March 29, 2012
People attend a demonstration in Valencia, Spain, during a national strike.
Jose Jordan / AFP/Getty Images

March 29, 2012
A woman cries after demonstrators smashed a shop window during heavy clashes with police during a 24-hour strike in Barcelona.
David Ramos / Getty Images

Eurozone crisis live: Violence in Barcelona Amid Spanish General Strike

The Guardian has numerous images and videos in its report Eurozone crisis live: Violence in Barcelona Amid Spanish General Strike

Protesters crowd in Madrid's landmark Puerta del Sol square for a closing rally tonight. Photograph: Paul Hanna/Reuters

As many as 900,000 people took part in the march to Madrid's centre square, Puerta del So.

Spanish Economy Will Implode

Labor reforms are badly needed but electricity price hikes of 7%, higher corporate taxes, increased VAT and other tax hikes are not. Spain needs more time not more tax hikes. With unemployment rate already at 23.3% austerity measures are guaranteed to make matter worse, and tax hikes on top of it all will be the nail in the coffin.

Prime Minister Rajoy forecasts the Spanish economy will contract 1.7% and government GDP targets and budgets are based on that. I bet that 3% contraction minimum is in the works if Rajoy enacts the tax hikes and austerity measures as planned.

Things will be much worse if the violence and strikes stay in an elevated state. Unlike the protests a year ago, these strikes have more serious overtones.

Spain Headed for Bond Revolt and Bailouts

The idea that Rajoy will cut the deficit to 5.3% this year and 3% next year are purely Fantasyland proposals.

For now, the bond market has given Rajoy the benefit of the doubt, assuming you call 5.35% on the 10-year bond any kind of "benefit". With the suspension of the LTRO, and a budget targets that cannot possibly be met, look for a substantial move up in Spanish bond yields.

That will also punish any Spanish banks foolish enough to load up on bonds in a misguided carry-trade play. With Spain, nearly everything is worse than the government reports, and the reports are awful.

A bond market revolt and bailout are in the cards this year. Ultimately, Spain will not survive in the Eurozone.

Mike "Mish" Shedlock
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