Spain struggles to meet Euro economic targets

What will eurozone leaders do to Luis de Guindos this time? Last time Spain's finance minister met his fellow finance ministers, a photographer snapped him being throttled by Jean Claude Juncker, the head of the eurogroup.

That was because he and Spain's prime minister, Mariano Rajoy, had demanded Brussels should relax the austerity targets for their struggling nation. Just a few weeks on, de Guindos is heading to today's (Friday's) meeting in Copenhagen amid fears that Spain needs a Greek-style bail-out.

Rajoy succeeded in getting Spain's budget targets for 2012 relaxed from 4.4% of GDP to 5.3% His officials told Brussels that their target of 5.8% would be "suicidal"; Rajoy said it was a "sovereign decision, made by Spain".

Rajoy's victory served as a warning flare to markets, although it delighted Spaniards. But yesterday it counted for nothing: as the new regime prepared to unveil its first Budget today, Spain was brought to it knees by violent protests. The demonstrations rattled the markets and pushed Spain's shares down and borrowing costs up.

Citigroup's Willem Buiter said he expected Spain to "be pushed into a troika programme of some kind during 2012", either because it gets shut out of the bond markets or its banks fail.

European finance ministers are gathering again to resolve the advancing debt crisis, but, despite international demands for action, the draft document is pointing to another dangerously damp squib.

Spain is the big worry: it's raced to the forefront of market fears - as well as the political agenda - with alarming speed.

International leaders and traders are now watching in horror. The tightrope Rajoy is trying to walk between austerity and human costs is the fault line dividing the whole of Europe.

On one side, there's the German-led plan forcibly to reduce debt by axing public spending, raising taxes and executing structural reforms; on the other is a demand for more support of the "sinner states" to avoid depression and anarchy.

But with hopes fading that massive support will be agreed in Copenhagen, the world is watching Rajoy instead. Can he turn around Spain's economy alone?

Today's budget is a vital test. Earlier this week, Rajoy promised a "very, very austere budget". He was backed by Cristobal Montoro, the budget minister, who said the budget was "tough".

Over the 100 days they've been in power, the pair have proved their mettle, pushing through a raft of radical reforms from axing severance pay to overhauling contract laws, and announcing sweeping cuts to the public sector. After today, Spain is expected to attempt euros 35bn (pounds 29.2bn) of cuts, on top of the euros 8.9bn already budgeted, as well as euros 6bn of tax rises.

But, in a country whose regions hold considerable power, passing reforms is very different from implementing them. On Sunday, Rajoy's PP party failed to win control in the crucial Andalusia elections, leading to warnings that his austerity measures would struggle in the regions.

Spain's banks are more critical still. Rajoy has overseen some consolidation and has demanded the banks come up with a euros 50bn recapitalisation programme by the end of the month. A European Commission assessment this week suggested it would be woefully inadequate, even if it were successful.

On top of the current debts, the banks - which lent billions of euros during the property boom - stand to suffer more as Spain's housing market continues to fall.

Citgroup's Buiter said: "New property and real estate-related losses are likely to come their way as a result of further property price declines. The Spanish banks are unlikely to be able to absorb these losses.

"If these institutions are deemed too important to fail, these losses could migrate to the public sector, which could have severe problems carrying them," he added.

Experts have called for the bail-out mechanism, the Eur-opean Financial Stability Fund (EFSF), to be used to help recapitalise the banks, if not the country.

So far, the answer from Brussels is no. But faced with losing its fourth biggest economy, the eurozone may be forced to reconsider. The only other alternative put forward in Brussels yesterday was an April Fool's statement from the European Council. The Pope would "pray for divine intervention to save the euro", it said. "This is now seen as the most credible strategy."