BBC News - The prospect of more government cuts has sparked violent protests in Madrid

Spain is due to set out its austerity budget for 2013 later, against a backdrop of a deteriorating economy and 25% unemployment rate.

The prospect of more government cuts has sparked violent protests in Madrid

Madrid is expected to outline 39bn euros ($50bn; £31bn) worth of savings, tax rises, and structural reforms.

It comes amid further protests this week, and growing expectations that Spain will seek a bailout from its eurozone partners.

On Friday, results of a stress test on Spain's banks are due to be released.

Rebound

The Spanish stock exchange's Ibex index rose 0.5% at the start of trading on Thursday, having lost 3.9% the previous day.

Other European stock markets also experienced modest rebounds.

Stocks fell sharply on Wednesday, as markets were rattled by violent protests in Madrid and Athens, as well as a statement from the Spanish central bank that the country's economy had continued to shrink in the third quarter of the year.

On the bond markets, the Spanish government's long-term cost of borrowing stabilised in early trading, at an implied interest rate of just over 6% for 10-year debt.

The 10-year rate had risen by a quarter percentage point on Wednesday, as lenders' fears over the government's ability to repay its debts, or stay within the euro, resurfaced.

The BBC's Tom Burridge, in Madrid, says that it seems investors are losing patience.

Spain will hope that Thursday's austerity measures will mean fewer economic conditions if it asks for a second bailout.

'Significant' fall

Prime Minister Mariano Rajoy fuelled expectations that Spain would ask for a bailout when he told the Wall Street Journal on Wednesday that if borrowing costs were "too high for too long", then "I can assure you 100% that I would ask for this bailout".

The economic situation remains grim, with comments from the central bank on Wednesday indicating that the country's recession deepened in the last three months.

"Available data for the third quarter of the year suggest output continued to fall at a significant pace, in an environment in which financial tension remained at very high levels," the Bank of Spain said in a monthly report.

Last week, Spain's second biggest bank, BBVA, estimated that up to another 60bn euros (£48bn; $78bn) will be needed to bail out the banking sector.

About 20bn euros has already been allocated to troubled banks.

Spain, the eurozone's fourth largest economy, fell back into recession in the last quarter of 2011, the second recession since the bursting of the country's property bubble.

But with a shrinking economy and unrest in the country, reducing the deficit via further austerity measures may prove a difficult task for the government.

The government has predicted a budget deficit this year of about 6.3%, but many analysts estimate it will be nearer 7% or higher.

The basic outline for the budget has been known since July, but not exactly where the cuts and savings will come from.

'Not credible'

There has been speculation that the budget could include such measures as taxes on shares transactions, "green taxes" on emissions or eliminating tax breaks, and even possibly ending inflation-linked pensions.

Madrid has already said that it wants to claw back a total of more than 150bn euros between 2012 and 2014: 62bn euros this year, 39bn euros in 2013, and 50bn euros in 2014.

But many analysts remain sceptical that this will be enough to resolve Spain's economic woes.

Sony Kapoor, managing director of the think-tank Re-Define, told the BBC: "I'm afraid we're going to get a budget which is credible neither for the markets, nor for the European partners.

"It's going to try and meet too many objectives all at the same time, serve too many masters, and end up not serving any of them."

The prospect of further cuts sparked off another wave of demonstrations, and more speculation about the secession of the wealthy Catalonia region.

Despite the public anger, Mr Rajoy said sacrifices were necessary.

"We know what we have to do, and since we know it, we're doing it," he said in a speech in New York.

"We also know this entails a lot of sacrifices distributed... evenly throughout the Spanish society," he said.

But Boris Schlossberg, managing director at New York-based BK Asset, said: "Spain is in a vicious cycle, because austerity is hurting economic activity and revenues, which causes greater fiscal gaps.

"People are starting to realise this, and the political will to absorb these sacrifices is diminishing by the hour," he said.