Spain's new leader vows EUR 16.5bn cuts

(MADRID) - Spain's incoming prime minister Mariano Rajoy vowed on Monday to slash the public deficit by 16.5 billion euros to calm financial markets with deep cuts to rescue the economy from crisis.

With five million people unemployed and warnings of a fresh recession looming, Rajoy gave the first details of how he plans to create jobs, clean up banks and reassure investors that he can stabilise Spain's finances.

Only pensions will escape the knife, he said in a speech to parliament ahead of his investiture, also vowing to complete a purge of Spain's financial sector and guarantee that it balances its budget.

"We will have to reduce by 16.5 billion euros ($21.5 billion) the shortfall between revenues and spending for the whole public administration," he told parliament in an investiture speech.

"This is our commitment and we are going to achieve it."

Rajoy's speech was keenly watched by markets, which have been anxious for months that debt crises in Greece and Italy may spread to Spain and across the eurozone.

Rajoy's speech appeared to provide some relief on Monday, with the Madrid stock market moving 1.38 percent higher.

He reiterated his pre-election vows to make deep cuts and sweeping reforms, filling in some of the details for the first time since the election.

"We will urgently undertake a series of measures to allow us to reduce costs and improve the functioning of the administration," he said.

This will involve "resizing the public sector and its personnel", getting rid of various public entities.

He outlined stable public finances as one of three policy priorities, saying his first new legislation will be a law to oblige Spain to balance its budget.

The second big policy is to finish cleaning up Spain's banks, which were brought low by the bursting of a construction bubble in 2008.

Rajoy said banks must tidy their balance sheets by selling buildings that are finished and carefully valuing other construction-linked assets.

"A second wave of restructuring is inevitable: more mergers, more capital requirements, a change of model and a change of the system of regulation," he said.

Thirdly, he promised structural reforms, including to the labour market, to make the economy more competitive.

Since his conservative Popular Party won a landslide election victory on November 20, pressure has risen on Rajoy to announce strong steps to lower the deficit and reassure the markets that lend to Spain to finance its debt.

Deficit targets imposed by the outgoing government have already prompted cuts in healthcare and education services in some regions, prompting street protests.

"Improving the purchasing power of pensions... will be the only commitment to increase spending that you will hear from me today," Rajoy said on Monday.

Rajoy had already vowed to stick to Spain's targets to cut the deficit to 4.4 percent of gross domestic product in 2012 and 3.0 percent of GDP -- the EU limit -- in 2013.

He acknowledged on Monday that the country may miss its deficit target of 6.0 percent of GDP this year.

"Let's hope not but this figure may be surpassed. We will know when the time comes," he said.

His speech to the lower house of parliament was to be followed by a debate and a vote by parliament -- in which his Popular Party holds an absolute majority -- to swear him in as prime minister.

His new government will take office on Thursday.