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As Protests Turn Violent, Spain Has No Choice

As economic and social tensions — not to mention borrowing costs — reach boiling point in Spain, the country has no choice but to introduce even more cost savings if it is to regain solvency, Barclays' Chief Southern European Economist told CNBC on Friday.

Euro zone ministers are expected to finalize the details of a bailout package for the Spanish banking sector on Friday, but the precise size of the package is unlikely to be decided before September. Spain will receive a payment of 30 billion euros ($36.7 billion) in the next couple of days for its weakest banks.

Antonio Garcia Pascual Pascual told CNBC’s “Squawk Box Europe” that the conditions attached to the latest bailout package were comprehensive.

“For the first time, the set of measures to restructure the banking system makes sense,” he said. “There will be the creation of an asset management company…burden sharing by bondholders and a diagnosis of all the banks and some will have to be probably [deemed] as unviable.”

Though the package may go some way to appease markets, Spanish bond yields continue to trade close to (and even above) the danger zone of 7 percent and on the streets a social crisis is brewing as mass protests against austerity turn violent. Tensions hit a peak on Thursday evening as national demonstrations organized by two major labor unions, to protest against the latest austerity measures, turned to violentclashes with police.

Pascual said that there was “no question” that the deployment of further measures (attempting to cut a further 65 billion euros of public spending) would not have an impact on economic activity.

However, he went further by saying that he, and others, believed that “more aggressive fiscal measures were necessary” to restore solvency.

“The markets want to see, as soon as possible, a return to primary surplus and I think adding in additional measures would probably help that.”

He said that neither Spain nor its European partners wanted to see a 400 billion euro ($490 billion) sovereign bailout of Spain rather than the current bank bailout (a mere 100 billion euros in comparison) and that Spain’s efforts were concentrated on avoiding this and maintaining the support from the European Commission and the continent’s Financial Stability Fund.

Pascual noted that Spain’s 180 degree turnaround on sales tax (VAT) rises and fiscal benefits was a sign of this need to “accommodate the European Commission…the government is basically aligning itself to the recommendations of the Commission, “ he said, adding, “It doesn’t have much of a choice, frankly.”

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