MADRID (Reuters) - Spain's ability to meet deficit reduction targets was thrown into doubt on Monday after voters angry over austerity and the EU'S highest jobless rate gave the ruling Socialists a fierce drubbing in local elections.
A week of protests by youth fed up with the stagnant economy and a 21.3 percent jobless rate preceded Sunday elections that left the Socialists without a single important mayor's office and only a handful of Spain's 17 regional legislatures.
Prime Minister Jose Luis Rodriguez Zapatero on Sunday night conceded the worse-than-expected defeat but said he planned to stay on to the end of his term in March next year.
"No one can call elections to lose them. If they call one now they will be crushed. The key right now is the Parliament," said Antonio Barroso, analyst with Euroasiagroup consulting firm. Small parties like the Basque Nationalist (PNV) have sided with the Socialists so far on the budget and other legislation.
Spaniards have suffered three years of economic trouble and their patience wore thin in the run-up to the elections when tens of thousands of mostly young protesters took to the streets and formed protest camps in city squares.
The discontent was reflected clearly in the polls. The center-right opposition Popular Party (PP) won its best result in municipal elections since Spain returned to democracy in 1978 after the Franco dictatorship.
But PP leader Mariano Rajoy -- now seen bound for victory in the next general elections -- did not call for early elections at a victory rally on Sunday.
His party does not have enough seats in Parliament to win a vote of no-confidence unless the PNV switched allegiances, which is unlikely but not unprecedented.
EURO ZONE CRISIS
Sunday's local voting took place against the backdrop of the euro zone debt crisis, which forced Zapatero to make steep spending cuts to fend off concerns Spain would follow Greece, Ireland and Portugal into budget problems and a bailout.
On Monday the premium investors demand for buying Spanish rather than German bonds rose to its highest since January amid concern over Greece's efforts to deal with its debt crisis without restructuring.
Zapatero has promised no more austerity measures, a fresh round of which could have trouble getting through Congress and also could provoke renewed protests.
"Implementing further cuts will be tough in the Parliament. It might be the straw that broke the camel's back," said Eurasiagroup's Barroso
But that means he might have trouble hitting his deficit reduction target of 6 percent of Gross Domestic Product this year, since economic growth is struggling to meet the official forecast.
Also, some analysts have voiced concern new regional leaders in Spain might uncover budget shortfalls that could threaten to derail central deficit reduction targets unless there is belt-tightening at the local level.
"There are two issues. One, to what extent the central government can offset some of the slippages at a regional level. And the other issue to what extent growth can really help reduce the deficit by another three percentage points in one year when we think the economy will remain very weak. So we see some slippage in the government's main target," Citigroup economist Giada Giana said.
PROTESTS SEEN DWINDLING
The central squares in cities around the country have filled up with crowds of demonstrators demanding more progressive policies such as flexibility for borrowers stuck with homes whose value has sunk below the mortgage they are paying off.
Many Spaniards are mired in debt after a housing and building boom and bust that destroyed the property market; and youth unemployment is 44 percent, double the EU average.
Protesters camped out the entire week in Madrid's Puerta del Sol plaza, setting up an infirmary, a computer tent and a "guerrilla garden" of vegetables with the help of donations from supporters.
The tents and tarps were still in place on Monday morning, but the crowd was smaller and analysts said the momentum of the movement will be hard to maintain.
"The big problem is that (movement) has no path into formal politics. There is no party legitimately speaking on their behalf. There is no green party as in other European countries which would back them," said David Bach, Professor of Strategy and Economic Environment at IE Business School in Madrid.
(Additional reporting by Nigel Davies; Editing by Maria Golovnina)
Source: Reuters US Online Report World News
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