Spain takes more steps to avoid debt market chaos

By Ciaran Giles

Associated Press

Published: Wednesday, Dec. 1 2010 7:47 a.m. MST

MADRID — Spain will sell off a third of its national lottery business, partially privatize airports and cut both a key jobless benefit and taxes for small companies in an unexpected move Wednesday to soothe market fears about debt.

The measures — particularly the politically sensitive abolition of a monthly €420 ($549) payment to people whose unemployment benefits have expired — show how anxious the government is to avoid a deterioration in market turmoil.

"The government will approve a package of measures on Friday to favor economic investment and employment and which will especially benefit small- and medium-sized companies," Socialist Prime Minister Jose Luis Rodriguez Zapatero told parliament.

Spain's financial markets have been pummeled in recent weeks by investors who fear the country may need a bailout like those received by Greece and Ireland.

The government insists it will not need help and the measures appeared designed to convince investors Spain will be able to control its high deficit and support growth in the eurozone's fourth largest economy. Rescuing Spain would seriously test Europe's finances.

Madrid's stock index, which had lost nearly 15 percent in November, jumped 4.5 percent by early afternoon on the news.

Pressure also eased on Spain's 10-year bonds, with yields at 5.3 percent, making for a 2.5 percentage point difference against the benchmark German 10-year bond. The spread reached a euro-era record difference of 3.05 percentage points at one stage Tuesday.

European Union Competition Commissioner Joaquin Almunia also welcomed the reforms.

"Very positive, they are extremely welcome. They are necessary, show the government's determination and they are in the right direction," said Almunia.

"We have to hope that they will also help to strengthen market confidence in the evolution of the Spanish economy and Spain's public finances," he added.

Zapatero said the measures will allow private investors a 49 percent stake in Spanish airports. The government hopes to gain some €9 billion ($12 billion) from the operation.

Management of Madrid's Barajas and Barcelona's El Prat airports will be leased out.

Some 40,000 small and medium-size companies are expected to benefit from the tax cut. The measures also include a reduction in costs and red tape for people wishing to set up new companies.

The special unemployment subsidy will expire in February. The measure was introduced in 2009 as the crisis began to bite hard. In less than three years, Spain has tumbled from being Europe's top job creator to having a eurozone high unemployment rate of nearly 20 percent, with just under 5 million people out of work.

Spain is now struggling to emerge from nearly two years of recession triggered buy a collapse in its real estate sector during the international financial crisis. Its chief task is to slash a swollen deficit from 11.2 percent of GDP in 2009 to within the EU limit of 3 percent by 2013.

The country's third-quarter GDP growth was flat after two quarters of weak growth, although it was up 0.2 percent year-on-year — the first such rise in seven quarters.

Zapatero, whose Socialist party is trailing badly in opinion polls, approved a package of belt-tightening measures in May that included wage cuts for civil servants, a freeze on most retirement pensions, and labor market reforms that make it easier and cheaper for companies to lay people off.

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