Spanish Socialists hammered in local elections

MADRID (Reuters) - Spain's ability to meet deficit reduction targets was thrown into doubt on Monday after voters angry over austerity and the EU's highest unemployment rate gave the ruling Socialists a fierce drubbing in local elections.

A week of protests by youth fed up with the stagnant economy and a 21.3 percent jobless rate preceded the Sunday elections, which left the Socialists without a single important mayoralty and only a handful of Spain's 17 regional legislatures.

Prime Minister Jose Luis Rodriguez Zapatero conceded the worse-than-anticipated defeat on Sunday night but said he planned to stay on to the end of his term in March next year.

"No one can call elections to lose them. If they call one now they will be crushed. The key right now is the parliament," said Antonio Barroso, analyst with Euroasiagroup consulting firm. Small parties like the Basque Nationalist (PNV) have sided with the Socialists so far on the budget and other legislation.

Spaniards have suffered three years of economic trouble and their patience wore thin in the run-up to the elections when tens of thousands of mostly young protesters took to the streets and formed protest camps in city squares.

The discontent was reflected clearly in the polls. The centre-right opposition Popular Party (PP) scored its best result in municipal elections since Spain returned to democracy in 1978 after decades of Franco dictatorship.

But PP leader Mariano Rajoy -- now seen bound for victory in the next general elections -- did not call for early elections at a victory rally on Sunday.

His party does not have enough seats in parliament to win a vote of no-confidence unless the PNV switched allegiances, which is unlikely although not unprecedented.

EURO ZONE CRISIS

Sunday's local voting took place against the backdrop of the euro zone debt crisis, which forced Zapatero to make steep spending cuts to fend off concerns Spain would follow Greece, Ireland and Portugal into budget problems and a bailout.

Spanish Central Bank Governor Miguel Angel Fernandez Ordonez warned on Monday that the government must redouble efforts to hit fiscal deficit targets because it cannot sustain its current debt financing costs for long.

On Monday the premium investors demand for buying Spanish rather than German bonds rose to its highest since January amid concern over Greece's efforts to deal with its debt crisis without restructuring.

Spain's Ibex benchmark stock index closed down 1.2 percent, along with other European stocks hit by jitters over the euro zone debt crisis, but also affected by concerns that the election outcome could weaken resolve to curb the deficit.

Zapatero has promised no more austerity measures, a fresh round of which could have trouble getting through parliament and also could provoke renewed protests.

"Implementing further cuts will be tough in the parliament. It might be the straw that broke the camel's back," said Eurasiagroup's Barroso.

But that means Zapatero might have trouble hitting his deficit reduction target of 6 percent of Gross Domestic Product this year, since economic growth is struggling to meet the official forecast.

Also, some analysts have voiced concern that new regional leaders in Spain might uncover budget shortfalls that could threaten to derail central deficit reduction targets -- unless there is belt-tightening at the local level.

"There are two issues," Citigroup economist Giada Giana said. "One, to what extent the central government can offset some of the slippages at a regional level. And the other issue -- to what extent growth can really help reduce the deficit by another three percentage points in one year when we think the economy will remain very weak. So we see some slippage in the government's main target."

PROTESTS SEEN DWINDLING

The central squares in cities around Spain have filled up with crowds of demonstrators demanding more progressive policies such as flexibility for borrowers stuck with homes whose value has sunk below the mortgage they are paying off.

Many Spaniards are mired in debt after a housing and building boom and bust that destroyed the property market, and youth unemployment is 44 percent, double the EU average.

"I expected the Popular Party to win. It hurts, but I expected it. But here the important thing is that the movement continues independent of politics," said Manuel Gomez, a 20-year-old studying social work who was still camped out in Madrid's Puerta del Sol plaza.

Protesters have set up an infirmary, a computer tent and a "guerrilla garden" of vegetables with the help of donations from supporters. The tents and tarps were still in place on Monday morning. But the crowd was smaller and analysts said the momentum of the movement will be hard to maintain.

"The big problem is that (the movement) has no path into formal politics. There is no party legitimately speaking on their behalf... no Green party as in other European countries which would back them," said David Bach, Professor of Strategy and Economic Environment at IE Business School in Madrid.

(Additional reporting by Nigel Davies; editing by Mark Heinrich)