New PM pledges to fight crisis: Spain

It was a salvo in the near impossible task of balancing fiscal discipline with the need to stimulate growth. Spain is sliding into recession, but must meet harsh European austerity demands as the euro zone debt crisis widens.

In his first speech as leader to the country's new Parliament, Rajoy said budget stability, a costly fresh round of bank consolidations and reforms to Spain's economy, such as its rigid labour law, would be his central objectives.

"We are confronting enormous difficulties and must make very demanding efforts," Rajoy, whose centre-right People's Party was elected by a landslide in November, told Parliament. After a two-day debate the self-proclaimed "Mr. Normal" will be sworn in by King Juan Carlos on Wednesday and name his cabinet.

The euro zone's fourth-largest economy is at the centre of the bloc's debt crisis and investors have driven up Spain's borrowing costs to near-unsustainable levels.

But Rajoy's promises of more austerity have boosted confidence and debt yields have fallen from euro-era highs since the election.

The risk premium on Spanish benchmark bonds over German benchmark debt narrowed on Monday by around 4 basis points to 331 basis points. This compares with 491 for Italy.

The Spanish blue-chip IBEX rose 1.5 percent, outperforming its European counterparts.

Rajoy began his address with dire warnings for the struggling economy, which is believed to have already fallen into its second recession in three years. Domestic demand is flagging and export growth slowing.

Spain's unemployment rate, moreover, is more than double the European Union average at 21.5 percent.

Copyright Reuters, 2011