Rajoy’s party must cut more to get bailout

Ben Southwood
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SPAIN will have to implement further austerity measures to get the bailout it wants, it emerged yesterday evening, following decisions made at a Eurogroup meeting that ran through the previous night.

Prime Minister Mariano Rajoy will have to produce a two-year plan of meaningful fiscal reform by the end of July in order to receive the €100bn (£79bn) bailout of its troubled banking sector.

These fiscal reforms will include reduced expenditure, increased taxation and labour market liberalisation, as well as banking reform – including a nine per cent capital requirement from the end of 2012 until 2014.

The European Commission (EC) will have the power to scrutinise the 14 Spanish banks that will benefit, which together make up some 90 per cent of the market.

Spain has also been given an extra year to meet its deficit target, set at three percent of GDP – it now has until 2014.

Yesterday saw the release of industrial production data for Italy and France, which unexpectedly showed that Italian industrial output rose 0.8 per cent in May compared to April. But French output crashed a full 1.9 per cent in the same period.

Italy also said yesterday that it may need to access Eurozone rescue funds, to help depress rising bond yields that make borrowing extremely expensive.

And the IMF warned that more Italian reform was necessary in its annual report yesterday, even after all of Italy’s impressive budgetary achievements.

The fund also warned that though Italian banks did look to be in a relatively good position, they would need to “maintain adequate capital and liquidity buffers to remain resilient”.

But Germany’s constitutional court may put a complete hold on bailout proceedings, as president Andreas Vosskuhle said yesterday a “very thorough examination” of the European Stability Mechanism (ESM) was likely – meaning the implementation of the scheme will be delayed until a decision is made.