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'This is reality': Spain slashes spending, raises taxes in $79B austerity plan

Paul Hanna / Reuters

An injured protester shouts as she is detained by riot police during clashes between supporters of Spanish coal miners and riot police in Madrid on Wednesday.

MADRID -- Spain announced a 65 billion euro ($79.85 billion) austerity package that includes tax hikes and spending cuts on Wednesday, a day after it won approval from its euro partners for a huge bailout of the country's stricken banks.

Prime Minister Mariano Rajoy told parliament the country's future was at stake as Spain grapples with recession, a bloated deficit and investor wariness of its sovereign debt. He said the nearly $80 billion in savings will be achieved through 2015 by a hike in sales taxes and a series of spending cuts through 2015.

"We are living in a crucial moment which will determine our future and that of our families, that of our youth, of our welfare state," Rajoy said. 

"This is the reality. There is no other and we have to get out of this hole and we have to do it as soon as possible and there is no room for fantasies or off-the cuff improvisations because there is no choice," he added.

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Spain's unemployment rate is more than 24 percent overall and 50 percent for young people. 

"What motivates us is the five million people out of work," the BBC News quoted Rajoy as saying.

Wednesday's increases in sales tax include a hike to 21 percent on products and services like clothing, cars, cigarettes and telephone services to 21 percent, and increase to 10 percent on goods such as public transport fares, processed foods and bar and hotel services. The sales tax on basic goods like bread, medicine and books stays at four percent.

The increases were widely expected but go against campaign pledges Rajoy made before he was elected in November and since he came to power.

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Other measures outlined Wednesday included:

  • further cuts in government spending beyond the reductions already outlined in the 2012 budget
  • wage cuts for civil servants and members of the national parliament
  • further closures of state-owned companies
  • tax deductions for homeowners to be scrapped
  • a 30 percent cut in the number of town councilors
  • changes to unemployment benefits designed to encourage jobless people to seek work quickly.
  • 20 percent cut in government subsidies to political parties and labor unions.

Spain issued $3.2 billion in bonds today, at the top end of the country's targeted amount. Still, that isn't enough to calm global fears about a European crisis domino effect. Lorenzo Bill Smaghi, former member of the ECB executive board, offers insight.

Deadline to meet targets extended
On Tuesday, eurozone ministers agreed to grant Spain an extra year until 2014 to reach its deficit reduction targets in exchange for further budget savings and set the parameters of an aid package for Madrid's ailing banks.

The decisions were aimed at preventing the currency area's fourth largest economy, mired in a worsening recession, from needing a full state bailout which would stretch the limits of Europe's rescue fund and plunge it deeper into a debt crisis.

"The Eurogroup supports the recently adopted Commission recommendation to extend the deadline for the correction of the excessive deficit in Spain by one year to 2014," ministers said in a statement.

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No final figure was agreed for aid to ailing Spanish lenders, weighed down by bad debts due to a housing crash and recession, but the EU has set a maximum of 100 billion euros ($123 billion) and some 30 billion euros would be available by the end of July if there was an urgent need.

A final loan agreement will be signed on or around July 20, Eurogroup chairman Jean-Claude Juncker told a news conference.

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In one key decision closely watched by investors, ministers agreed that once a single European banking supervisor is set up next year, Spanish banks could be directly recapitalized from the euro zone rescue fund without requiring a state guarantee.

That fulfils an EU summit mandate to try to break a so-called "doom loop" of mutual dependency between weak banks and over indebted sovereigns, but represented a climb-down for hard-line north European creditor countries.

The Eurozone remains in a delicate balance as the financial crisis in both Greece and Spain threaten to take down their European partners. How will the financial troubles abroad affect the presidential election in November? Parag Khanna, co-author of "Hybrid Reality," joins the Melissa Harris-Perry panel to discuss.

In a nine-hour marathon meeting ministers of the 17-nation eurozone also settled a series of long-delayed appointments.

As ministers were meeting, a top ECB policymaker warned that Europe's debt crisis was now more acute than the 2008 financial turmoil that felled U.S. investment bank Lehman Brothers.

"The eurozone crisis is now much more profound and more fundamental than at the time of Lehman," ECB Executive Board member Peter Praet told a conference in Lisbon.

The Eurogroup ministers were tasked with fleshing out a bare-bones agreement reached by EU leaders at a summit last month on establishing a European banking supervisor and using the bloc's rescue funds to stabilize bond markets.

But differences persisted between north European countries such as Finland and the Netherlands and southern states led by Italy and Spain.

Msnbc.com staff, Reuters and The Associated Press contributed to this report.

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