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Spain Approves New Austerity Measures, Limited Stimulus

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MADRID — The Spanish government approved new austerity measures and a limited economic stimulus package to ease investor fears about its debt – and insisted again it was taking strong steps to right its ailing economy.

Markets responded positively to Friday's actions after weeks of turmoil, but the country was thrown into chaos again after air traffic controllers unexpectedly staged a massive sickout just hours after top government officials endorsed a move to partially privatize key airports.

At least 200,000 travelers were stranded on the eve of a long holiday weekend. Prime Minister Jose Luis Rodriguez Zapatero ordered the military to take over air traffic control, but there was no immediate information when flights would resume.

Zapatero himself canceled a trip to an Iberoamerican summit in Argentina so he could preside over the cabinet meeting where plans were also approved to sell off a 30 percent stake in the government-owned national lottery, cutbacks to a key jobless benefit, tax cuts for small businesses and an increase in the tobacco tax.

"We believe we are contributing to the momentum of the country's economic activity with this reform package," said Economy Minister Elena Salgado. "We are eliminating obstacles and reducing costs."

The latest measures, first announced Wednesday by Zapatero, were welcomed by both markets and the European Union after weeks of speculation that Portugal and Spain could follow Greece and Ireland in needing a massive financial bailout.

Spanish and Portuguese stocks recovered Friday for the third consecutive day, reversing severe losses last week. Spain's benchmark index closed 0.7 percent higher, while Portugal's ended the day with a similar gain.

Borrowing costs in countries also eased Friday, a day after the European Central Bank said it would keep helping the continent's banks and amid speculation it may also be quietly buying the bonds of debt-burdened eurozone countries.

The yield on Portuguese 10-year bonds fell below 6 percent for the first time in three months, while Spanish yields hovered around 5 percent after reaching 5.7 percent earlier this week.

Germany's 10-year bonds, a benchmark of global lending safety, stood at 2.8 percent.

But just after the markets closed, Spain was forced to shut down the eight airports and airspace around Madrid because the controllers left their posts or didn't show up to work.

The head of Spain's air traffic authority, Juan Ignacio Lema, called the sickout "intolerable" and apologized to Spaniards.

Monday and Wednesday are holidays in Spain, and many Spaniards take advantage of the days off for a five-day weekend or a week of vacation. Airlines told passengers that many flights would not leave Saturday, and Spanish government officials did not immediately say when the military would be able to restore air travel order.

Spain's air traffic controllers have been involved in a long negotiation process with officials over wages, working conditions and privileges.

The dispute intensified in February when the government restricted overtime and thus cut average pay of controllers from euro350,000 ($464,000) a year to euro200,000 ($265,000).

In less than three years, Spain has tumbled from being Europe's top job creator to having a eurozone high unemployment rate of nearly 20 percent, with nearly 5 million people out of work. Spain – limping out of nearly two years of recession triggered by a collapse in its real estate sector – is hoping to slash its deficit from 11.2 percent of GDP in 2009 to within the EU limit of 3 percent by 2013.

In May, when markets were spooked by the near-bankruptcy of Greece, Spain cut wages for civil servants, froze most retirement pensions, and made it easier and cheaper for companies to lay people off.

Zapatero's Socialist government also pledged to reform the pension system by Jan. 28, and is likely to raise retirement age from 65 to 67, an unpopular move that sparked a nationwide strike in September.

The government hopes to raise euro9 billion ($11.9 billion) by selling a 49 percent stake in Spain's airports in a deal that would also shift the management of Madrid's Barajas and Barcelona's El Prat airports to the private sector.

Selling the lottery stake would give Spain up to euro5 billion ($6.6 billion). The lottery, famed for its Dec. 22 "El Gordo" (The Fat One) game, brings some euro3 billion ($3.9 billion) into the state's coffers annually.

Meanwhile, some 40,000 small and medium-size companies are expected to benefit from the tax cut. The measures also include a reduction in costs and bureaucracy for people setting up new companies, making it possible to incorporate a new small business in a day for around euro100 ($132).

A special subsidy of euro426 ($564) for people whose unemployment benefits have run out will not be renewed beginning in February.

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Ciaran Giles and Harold Heckle in Madrid contributed.

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