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Rajoy remains in hiding despite "exceptional" economic straits

Prime Minister not due in Congress until February as Cabinet mulls new austerity measures

Although the Popular Party (PP) says that the situation it inherited from the Socialists is "exceptional" and requires "unpopular" measures, nobody should expect Prime Minister Mariano Rajoy to appear in public to explain them any time soon.

The most visible face of the center-right government has so far been Rajoy's deputy, Soraya Sáenz de Santamaría, who confirmed on Thursday that the nation's leader will address Congress before February. The PP's absolute majority enables it to stop requests for Rajoy to personally explain why his administration is already breaking its campaign promises, including a pledge not to raise taxes and not to cut into social benefits.

It was up to Santamaría to explain on Thursday that the series of U-turns is due to the fact that "the reality is quite another" to what was expected, forcing the government to adopt "tougher measures of an extraordinary nature." She said the Socialist government had not warn her party that the budget deficit would be closer to eight percent than six percent, nor that the Social Security system surplus would vanish.

On Thursday, the Cabinet did not adopt any new measures, but prepared two initiatives to be fleshed out in the coming weeks: a plan to combat tax fraud and the elimination of public agencies, foundations and corporations, of which there are over 4,000 across the territory. In both cases, the goal is to slim down the deficit in partnership with regional governments.

Santamaría did say that the government will place limits on cash transactions to curb the underground economy, but without specifying whether it would be an amount-based limit, as in Italy (1,000 euros) and France (3,000 euros), or a different system.

Meanwhile, Valencia's regional government, currently grappling with massive debt and a liquidity shortage, announced a plan to save over a billion euros based on cuts to health spending (440 million) and public administration personnel (379 million) as well as tax hikes for higher earners.

Risk premium back on the rise

As the new Deputy Prime Minister Soraya Sáenz de Santamaría announced further austerity measures on Thursday, investors showed renewed wariness of the prognosis for the Spanish economy with the country's risk premium and stock market performing worse than they had in weeks.

Pressure on Spain's sovereign debt continued to increase, with the risk premium rising above 380 basis points for the first time since mid-December to finally close at 375. When Mariano Rajoy took office on December 20, the premium stood at 315 basis points, and after a brief drop to 305, the trend has been consistently upward.

Meanwhile, the blue-chip Ibex 35 index shed 2.94 percent to end the day below the 8,500-point mark, as investors decided to fold their sails and reap some profits.

Their decision came as Spain confirmed that its deficit will be closer to eight percent than six percent as previously promised, and on the same day that the Financial Times quoted Economy Minister Luis de Guindos as saying that Spanish banks need to provision around 50 billion euros, or slightly over four percent of GDP, to cover their bad property assets.

Also this week, the central government stepped in to prevent the regional government of Valencia from defaulting on a maturing loan of 123 million euros, underscoring the financial struggles of Spain's 17 regions, many of which overshot their deficit targets for 2011.

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