A day after a general strike disrupted transport, almost paralysed heavy industry and brought thousands of protesters into the streets, the conservative government must say how it can meet deficit targets that many believe it will struggle to achieve.

Prime Minister Mariano Rajoy cannot afford to upset nervous bond markets that pushed the premium for Spanish 10-year debt on Thursday close to their highest levels since early January.
Markets fear the government, which took power at the end of last year, will fail to deliver the budget cuts even though the European Union has softened the deficit targets.

Brussels has agreed to let Rajoy aim for a 2012 deficit equal to 5.3 percent of gross domestic product, a less-demanding goal than the original 4.4 percent but still a huge step from 8.5 percent last year.

"Even after the relaxation of the 2012 deficit reduction target, we think that making ends meet will be challenging, though not impossible," Morgan Stanley said in a research note.
"We expect the Spanish economy to shrink by 2 percent this year, courtesy of a substantial belt-tightening, still tight credit conditions, slowing exports and higher oil prices."

The Spanish economy entered recession in the first quarter of this year, according to government estimates, the second since 2009 and after two years of anaemic growth.