The future of the euro is at stake: Spanish deputy PM

MADRID (Reuters) - Europe must move quickly with measures to pull Spain back from the brink of a debt crisis, with the future of the euro common currency at stake, Spanish Deputy Prime Minister Soraya Saenz de Santamaria said.

Saenz, a long-time politician in the centre-right People's Party, spoke with Reuters Editor-at-Large Harold Evans during a critical week for Spain as it seeks to fund a 19-billion-euro rescue of one of its biggest banks and the country's autonomous regions face a liquidity crunch.

Spain's borrowing cost hovered close to an unsustainable level on Tuesday - the yield on the benchmark 10-year government bond was 6.5 percent - as investors worry costly rescues of the regions and banks will push Spain's finances over the edge.

Spain has made enormous strides in containing its deficit and making its economy more competitive, Saenz said, but it needs European-wide measures to give confidence to the common currency and restore calm to markets.

"If the EU doesn't reinforce the euro zone with some sort of mechanism, it's not about who leaves (the euro), it's about the EU itself. What is the EU without the euro?" Saenz, 40, said at the prime minister's complex, Moncloa, on the outskirts of Madrid on Monday.

"It's about the future of the euro."

Spain is asking for huge sacrifices from its citizens she said, with budget savings this year of more than 45 billion euros, which have meant spending cuts in schools and hospitals.

At the same time, she noted, interest payments on debt this year will rise to 30 billion euros.

"For states that are making the effort it's not possible to explain to their citizens that what they save through austerity will then be spent on higher interest payments on debt," said Saenz, a lawyer by profession and one of Prime Minister Mariano Rajoy's closest advisors.

Meanwhile, almost one in four Spanish workers is jobless and unemployment is expected to rise even further in the coming months as the economy contracts again after barely emerging from its last recession.

"Countries which are doing reforms need to find a way to be rewarded rather than punished," she said, pointing to her government's overhaul of labor market rules to make companies more competitive, as well as its reforms of the financial sector.

SWIFT EUROPEAN ACTION NEEDED

Spain says it can foot the rising bill to rescue its banks on its own, after a property market crash left them with more than 184 billion euros in sour assets.

And the government is expected to announce later this week guarantees that will help the country's 17 autonomous regions refinance their debt.

Saenz declined to say what measures European institutions should take, saying "the European Central Bank is an independent institution."

"We would like the decision to be taken as quickly as possible, with agility. That's better for everyone, not just for Spain. We have to clear up doubts," Saenz said.

On the European stage Spain has pushed for immediate solutions such as more ECB liquidity or purchases of Spanish sovereign debt on secondary markets by the central bank.

For the short-term Spain does not foresee any euro area agreement on joint debt, or eurobonds.

Saenz said voters who go to the polls in Greece and France on June 17 must know that Europe as a whole will back countries that are tightening their belts to meet Europe-agreed deficit cutting targets.

"I trust that (the European institutions) are very aware, especially at this moment, that they have to send a clear message to countries that have elections," she said.

"The message from the EU should be that serious governments are treated with the same seriousness that they are acting with. This is a good message for citizens who need to take political decisions," she said.

GOOD NEWS ON SPAIN

Saenz said that while markets are focused on Spain's risks there is also a lot of good news that should be taken into account.

The PP has an absolute majority in Parliament, which means it can act swiftly to pass reforms.

Under Rajoy's government's repeated threat of sanctions, the regions submitted very austere budgets for this year.

Spain badly missed its deficit target last year, it came in at 8.9 percent of gross domestic product rather than 6.0 percent, mainly because of overspending at the regional level.

Although the collapse of the construction sector left the economy with a gaping hole, Saenz said there are bright areas and that Spain's indices of competitiveness are improving.

"We have a very internationalized economy, exports have been growing in recent years and new market niches have been opened," said Saenz.

She said that other European countries should fall in line with Spain's conviction that austerity and growth are not mutually exclusive.

"You need fiscal consolidation in order to grow," she said.

(Additional reporting by Michael Stott; Writing by Fiona Ortiz)

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