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Spain Needs 'Intelligent Austerity' as Elections Loom: MP

As the Spanish people go to the ballot box this weekend, the prognosis for Spain's economy is gloomy with bond yields and credit default swaps hitting new record highs.

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On Thursday, Spain paid an average yield of 6.975 percent to issue 3.6 billion ($4.86 billion) of 10-year bonds, the highest since entering the euro and dangerously close to the 7 per cent level widely regarded as unsustainable. 

Traders believe that the European Central Bank (ECB) is buying up Spanish as well as Italian bonds this week, heightening fears that yields would be even higher if the ECB was not involved.

Ireland, Portugal and Greece all sought bailouts from the troika of the International Monetary Fund, the ECB and the European Commission before yields on their bonds hit these levels.

"We need intelligent austerity that combines austerity with public investment to reactivate the economy and create jobs," Pedro Sánchez Pérez-Castejón, Vice-President of the incumbent Spanish Socialist Worker's Party (PSOE), told CNBC Friday.

"We need to have wealthy public finances. We also need to improve public investment to improve economic growth."

The PSOE is expected to lose resoundingly to the People's Party, (PP), led by Mariano Rajoy, in Saturday's elections. 

The changing of the guard in Spanish politics comes after a week where Greece and Italy also swapped their leadership.

Europe Not the Problem

The debt crisis in the euro zone has led some to question whether the single currency can survive.

"Europe will never be the problem for the world or the member states, it will be the solution," said Sanchez.

"The solution for this crisis of the euro will be more economic governance at the European levels."

The market's focus has turned to Spain amid concerns about the country's banking sector, high unemployment and stagnant GDP growth – and the social unrest they may cause.

Its economy stalled in the third quarter, according to GDP figures this week. 

"At the core of the PP’s programme is fiscal stability, reforms of the labor market and financial sector, and increasing the competitiveness of the Spanish economy," analysts at Credit Suisse wrote in a research note.

"But in order not to alienate voters the program has eluded any specifics on what this will cost and how Spain will meet deficit reduction targets."

"Although Spain’s public sector debt is below the euro area average the fact that the primary balance remains in deficit makes Spain’s debt dynamics more vulnerable to the sovereign crisis and to weaker growth. The latter also has negative consequences for Spain’s banking sector," said Credit Suisse analysts.