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Last week, the government of José Luis Rodríguez Zapatero narrowly won approval for an extra 15 billion euros, or $18.4 billion, in spending cuts — in an effort to bring the budget deficit down to 6 percent of the national economic output by 2011, from 11 percent last year. With labor unions and business leaders at loggerheads, Mr. Zapatero is also expected to present a plan for loosening labor rules this week.
Three months ago, a package that reduced the pay of civil servants and made it easier to hire and fire workers would have been hailed as transformative, especially in an economy stuck in a recession for two years and nearing 20 percent unemployment.
Instead, the proposals are being seen as a desperate bid by an unpopular government to remain in office.
On Friday, Spain suffered another downgrade of its debt even as calls were increasing for early elections after the close budget vote. Together, the two events suggest to political leaders throughout Europe that voters and investors are fed up with the lack of resolve and leadership in dealing with the economic situation.
“The government made a real mistake in being late in recognizing this crisis and continues to make a mistake in the ‘drip by drip’ measures to solve it,” said Jordi Sevilla, one of Mr. Zapatero’s former ministers. “You can only get credibility by presenting one strong and coherent package.”
In light of the international rescue package for Greece, investors want Spain to demonstrate that it can cut its bloated deficit fast enough to avoid emergency aid. Given the size of the Spanish economy, a rescue would be much more costly than the Greek bailout. Yet a debt default or severe restructuring would be even worse, crippling foreign banks whose lending underpinned Spain’s debt splurge.
Mr. Zapatero has pledged to cut the budget deficit to 3 percent of gross domestic product by 2013 — the limit under euro rules — from 11.2 percent in 2009. Spain’s central bank said on Monday the latest austerity measures “strengthened substantially” the likelihood of reaching that goal.
But the government also lowered its 2011 growth forecast on Friday to 1.3 percent from 1.8 percent. Moreover, many private economists are skeptical of those projections, which suggest that Spain could fall far short of its deficit-cutting goals. Mr. Zapatero recently warned the rich to expect higher taxes, an indication that his austerity package was not yet complete.
With 25 billion euros in refinancing coming due in July and with Spain’s cost for issuing new debt now elevated by more than a full percentage point, Mr. Campa acknowledged that even the government’s best efforts may not appease impatient investors.
“We have to get ahead of the curve for the markets,” he conceded.
Part of what worries investors is the tremendous overhang of souring real estate loans — the residue of Spain’s collapsed property boom — that languish on the balance sheets of the country’s banks.
José García Montalvo, an economist in Barcelona, estimates that of the 450 billion euros in loans to the property sector, 165 billion euros are problematic and this number is bound to rise if real estate prices keep falling.
Mr. Campa cited an International Monetary Fund stress test that concluded Spanish banks would need to raise no more than 25 billion euros against bad loans.
Spaniards once thought their country was largely insulated from the debt crises in Ireland and Greece. Their mood has changed from giddy, when their homes tripled in value and they were protected by an elaborate safety net of public aid and family support, to grim.
Always a country of savers — in contrast to Portugal and Greece — Spaniards have begun to sock away even more. Household savings have almost doubled in two years to 19 percent, according to data from Spain’s central bank.
