Protesters take to the streets in the Spanish capital as the pressure grows on prime minister Mariano Rajoy to follow Greece, Portugal and Ireland and accept a full sovereign bailout for the country

THE THOUSANDS gathered outside the Spanish assembly in central Madrid chanted “You do not represent us”, “This crisis is theft” and “The delinquents are in the parliament” on Wednesday night.

Raul Piñuela, a 33-year-old teacher, protested at the Plaza de Neptuno at what he says are costs, including the bailout of profligate Spanish banks, that the Spanish people should not be paying for.

Government cuts have taken 15 per cent out of his wages and he has also lost medical insurance and travel and social benefits over that time. The cuts have left people struggling to pay their bills, he says.

“We are paying for something we have not done – we are paying for something we shouldn’t have to,” he says, complaining about higher and new taxes the government has introduced.

The pressure on Spanish prime minister Mariano Rajoy has grown to follow Greece, Portugal and Ireland and accept a full sovereign bailout for the country from the European Union and the International Monetary Fund – beyond the bailout of up to €100 billion for Spain’s banks agreed last June.

His problems have been compounded by violent clashes between anti-austerity protesters and police on Tuesday night and a constitutional crisis over Catalonia, which has called a snap election for November in what is seen as a referendum on independence from Spain.

While the country’s most economically powerful region, it is also the most indebted and has sought a €5 billion bailout from Madrid. Two other autonomous regions, the Basque Country and Galicia, will hold elections on October 21st.

Rajoy’s regional woes increased further yesterday as Castilla La Mancha, run by his own centre-right Popular party, sought a €850 million bailout, becoming the fifth indebted Spanish region to seek help.

Figures this week showed that Spain’s recession is deepening and that the country will struggle to meet a deficit target of 6.3 per cent for 2012 given the performance of the economy this year as Madrid tries to grapple with a run on its banks.

The flight of capital from the Spanish banks continued last month as deposits fell again, dropping to their lowest level since April 2008. Spain’s borrowing costs have also risen sharply again.

Today, the latest review of Spain from credit ratings agency Moody’s raises the possibility that, in light of Madrid’s difficulties, the country may be downgraded to junk status, while the results of the independent stress tests will determine whether a previous estimate of €60 billion still stands.

“When sorrows come, they come not single spies but in battalions,” El Pais journalist Andrew Sim said of the mounting problems facing Rajoy’s government, citing the famous line by Claudius in Hamlet.

In light of these difficulties, Rajoy’s equivocation, previously seen as tactical to secure the best deal for Spain from Europe, is now viewed as playing a dangerous game of bluff by the euro zone’s fourth largest economy at a time of such uncertainty around the future of the currency.

Rajoy must persuade the euro zone power base that Spain can impose further cuts to reduce the shortfall in the budget by more than €60 billion by 2014 and avoid a full bailout for Spain.

This will be an uphill battle; he is already seeking savings of more than €13 billion this year but further economic contraction implies that he must seek up to €10 billion more.

The government unveiled details of the 2013 budget yesterday evening to cut the deficit by €40 billion by 2014, but just under 64 per cent of state spending will still go on “social spending” such as pensions and benefits, an area that the state is stubbornly refusing to tackle despite external pressure.

While devising its own self-help measures, the Spanish government is said to be privately preparing measures required to meet conditions attached to support from the European Central Bank’s bond-buying plan for struggling countries.

“It is just a question of time before Spain will seek financial assistance; it just depends now on how Spanish bonds perform over the next two to three weeks,” said banking analyst Daragh Quinn of Nomura in Madrid.

“If you look at capital flows, the amount of debt that Spain needs to issue and the outlook for the economy – all of those numbers point to Spain needing additional assistance from Europe.”

Jose Ignacio Goirigolzarri, the executive chairman of Bankia, told The Irish Times that there were a number of possible outcomes for Spain but added that the ECB’s bond-buying plan was “absolutely key” to helping the country.

For a country where one in four, about six million people, are out of work and where one in every two people under 25 is unemployed, further austerity may tip the country into an even bigger political crisis for Rajoy.

“Spain is increasingly slipping from his hands,” said Alfredo Perez Rubalcaba, the leader of the country’s opposition socialist party. “There are very clear fractures in Spain, and the one I am most worried about is social fracture.”

Banking sources expect the results of the stress tests of the country’s lenders by independent financial consultants Oliver Wyman today to confirm the capital hole of about €60 billion, including a €26 billion deficit at Bankia, the country’s third largest bank and worst toxic lender.

This is above the nationalised bank’s own €19 billion estimate last May, though the sources

said that most of the difference relates to tax assets the bank booked as capital gains four months ago. The remainder of the difference relates to a more adverse scenario where Wyman expects the unemployment rate to rise to 27 per cent in 2014 and for the economy to shrink a further 7 per cent over three years making this a six-year recession.

While the overall bank capital requirements remain largely the same, the intention of the stress tests is to prove to the markets that these are not Spain’s own estimates of the problems in its banking sector.

Goirigolzarri believes building credibility in the Spanish banking system and the government’s ability to save it will take more than just one announcement.

“It is important for the country but I never believe in one shot – you build up credibility in time,” he said in an interview in his office at the top of Bankia tower in Madrid.

“I believe what makes the stress tests important is that the market believes that what we say is a consistent solution and that they give us trust. If they consider that the tests are not worth paying any attention to, we are going to lose an opportunity.”

The independent stress tests are an important step for Ireland as the Fine Gael-Labour government is pinning its hopes on a deal to pass some of Ireland’s €64 billion bank debt onto the wider euro zone arising from the plan to use the euro bailout funds to pay for Spain’s banking losses.

Goirigolzarri takes the same view of this week’s spanner-in-the-works joint statement from German, Finnish and Dutch finance ministers as the Irish Government, dismissing their suggestion that “legacy assets” or past bad bank assets remain with national governments. He believes that the deal to split state and bank debt in Spain and Ireland has been agreed and should be honoured.

“For me it is difficult to understand what the statement meant. Were they talking about the Irish banks or where they considering the Spanish banks?” he said.

“I don’t have a clear understanding of what they said, but in any case in July we defined the procedures and a memorandum of understanding. I suppose – and I hope – that everyone is going to honour their words.”

A failure to address Spain’s problems will continue to pose contagion risk for the rest of Europe.

“The longer Spain waits, the greater the danger that the entire EU could be infected by the Spanish virus, the loss of credibility, with Italy next in line and France in danger too,” said Pedrag Dukic, a senior equity trader at CM Capital Markets in Madrid.

John Moran, secretary general of the Department of Finance, says today’s stress test results in Madrid should help Ireland’s cause.

“Europe has to sort itself out,” he told The Irish Times at a pensions conference in Dublin on Tuesday. “If Spain can get stability back into the system, that is broadly positive for us as well.”

Given the “battalions” of sorrows emerging for Rajoy this week, the chances of Spain steadying itself on its own remain in doubt.