Spain tires of penitence even amid the Lent processions

As hooded Easter week penitents processed mournfully through Spain's cities on Good Friday, Spaniards were wondering just how much past economic sins will come back to haunt them.

With bond yields hitting records for the year and the most austere budget in decades bringing further pain to a country already stricken by 24% unemployment, prayers for deliverance are unlikely to be answered any time soon. Analysts increasingly believe that like the other "sick men" of Europe – Ireland, Greece and Portugal – Spain will eventually need bailing out.

For some, it has already become too much. Last week, Diego Salazar carted dozens of cardboard boxes of books from his Madrid apartment to the aptly named La Realidad ("Reality") bar and began selling them off at €3 an item. "This just doesn't work any more," said Salazar, a Peruvian who has worked as a journalist, writer and editor in Madrid for more than a decade. "I'm going back to Lima and I can't take the books with me."

Analysts suspect Spain will need aid from the so-called troika – the European Commission, the European Central Bank and the International Monetary Fund – that most recently rode to the rescue of Greece for a second time. "Spain is likely, in our view, to be pushed into a troika programme of some sort during 2012," according to analysts at Citigroup.

Spain's government, meanwhile, tried to outdo the spiky-hatted nazareno penitents by putting on a public display of self-chastisement aimed at convincing sceptics about the seriousness of its deficit-cutting measures. "First the deficit, second the deficit, third the deficit," intoned budget minister Cristóbal Montoro as he gave details of €27bn (£22bn) of cuts, tax hikes and extraordinary measures for this year.

In an attempt not to inflict too much damage on the economy, Montoro included a tax amnesty in the budget, allowing those who have been cheating the revenue to pay a one-off 10% tax on their hidden money. this has been conceived as a way of belatedly cashing in on the spectacular residential construction boom – a bubble, that four years after it burst, has left building companies and developers saddled with huge loans they can not repay.

The same is not true of the underground economy, where €500 notes readily changed hands during the boom. Montoro hopes some €2.5bn of this black-market cash will find its way back to the exchequer. If the measure fails, further cuts will become inevitable.

Prime minister Mariano Rajoy admitted things had got out of hand during the boom, when regional governments and town halls competed with one another to spend riches generated by the housing bubble. "We can't have twice as many airports as Germany – no one understands that," he said. "Nor can we have sports pavilions all over the place, or conference halls and exhibition centres, at least not these days." He was referring, among other things, to the shiny new airports at Castellón and Ciudad Real – two empty white elephants that are symbols of the wild spending encouraged by local politicians and now-bust savings banks during the boom years.

The glut of toxic loans to developers, many still in the banking system, has forced a further round of consolidation, with the union of CaixaBank and Banca Cívica now creating the country's biggest high street bank.

Ministers insist the only way Spain can maintain its credibility in the markets is to meet the harsh demands of the eurozone's other finance ministers who have demanded Spain slash its deficit. Spain's finance minister, Luis de Guindos told the Wall Street Journal that his country faced a lose-lose situation. "If you don't make enough adjustments, the markets will penalise you. But if you go too far, markets could also penalise you," he said, referring to the additional damage that an excessively tight budget could do to an economy already predicted to shrink 1.7% this year.

The government's determination to obey eurozone diktats contrasts with the feeling on the street. During a general strike on 29 March, protesters began to target not just Rajoy's conservative People's party government, which has been in power for just over three months, but also Brussels and German chancellor Angela Merkel. "It is hard to accept the way the Germans are behaving," said one Spanish analyst, who asked not be named. "This week they celebrated the fact that their unemployment hadn't increased while everyone else's had. But don't they realise that what they are doing means they will be next?"

Rajoy's standing at home, dented by the general strike and poorer-than-expected election results in Andalucía and Asturias, was further hurt by the way he boldly and unilaterally announced a "realistic" deficit target of 5.8% of GDP – only for angry eurozone ministers to force him to accept an even lower target of 5.3%. In private, officials admit Rajoy had made a foolish bid for fiscal sovereignty. "That was very clumsily handled," said one.

House prices, already down about 25% from their peak, are set to fall by the same amount again over the next two to three years. Estimates forecast that up to one in four mortgage-holders will be left in negative equity by the end of this year. Reforms introduced by de Guindos are forcing banks to realise losses and sell off the newly built homes they have accumulated from bankrupt developers.

A fire sale of bank-owned property has seen eager buyers snapping up cut-price homes, but at the end of last year the country still had an estimated 700,000 new homes to sell off. Banks will hurt more as mortgage defaults grow and bad property loans are written off. It remains unclear as to whether current provisions and future profits will cover the hole – though analysts say Spain does not have an Irish-sized problem on its hands.

But, while de Guindos insists Spain has to make sure that the markets do not lose hope in its future growth, some see the budget killing off many of those hopes. Investment in education, training and research, for example, has been slashed – squashing dreams of Spain becoming a modern, knowledge-based economy. "These figures are scary, precisely because the idea of this fiscal adjustment is meant to be to allow us to return to sustainable growth," said economists Florentino Felgueroso and Sergi Jiménez in a blogpost, pointing to cuts of 35% in training programmes and 26% in research funding.

The estimates already point to this year's deficit-slashing budget taking 2% off Spanish growth. "Official growth forecasts appear too optimistic to us," the Citigroup analysts warn.

A deeper than expected recession, combined with the difficulty of forcing regional governments to shoulder their share of the burden, means many are sceptical that Spain can slash its deficit from 8.5% to 5.3% this year. Spain's national debt may still be lower than most eurozone countries, at an estimated 80% of GDP by the end of the year, but the prospect of missing a deficit target would help push bond yields to dangerous, and possibly unsustainable, levels.

Rajoy's government is seen as having tried hard to help recovery, including reform of the labour market, but this may have come too late. At his family's fruit and vegetable shop in Madrid, 22-year-old Valentin Martínez agreed with Rajoy's verdict that Spain had lived beyond its means. "I think we have all behaved like fools," he said. "My father earned lots of money working in construction, but he spent it all. Now he's a car park attendant."