By Ambrose Evans-Pritchard

LONDON, England - December 19, 2011 - Spain's new premier Mariano Rajoy has launched a fresh blast of fiscal austerity at his inauguration, describing the national outlook as "desolate" and his task like that of a father feeding four hungry mouths with bread for two.

The conservative leader pledged to fight Spain's unemployment curse by shaking up the labor markets. The jobless rate has hit 22.8%, with 5.4 million people out of work. The tally is certain to rise further as the economy falls further into Depression.

Spain's 10-year bond yields dropped to 5.09%, far below the 6.5% stress peak seen last month, even though Mr. Rajoy said the government will miss its budget deficit target of 6% of GDP this year.

Global funds are gobbling up Spanish and Italian debt on bets that lenders will exploit the European Central Bank's offer of three-year credit at 1% to buy sovereign debt, playing the "carry trade" on the yield spread.

Mr. Rajoy evoked the triumph of the mid-1990s when Spain clawed its way back to viability and astonished EU officials by meeting EMU entry terms. But the path was smoothed by a peseta devaluation of 45% over the preceding three years.

It may prove harder this time within the euro straightjacket. "The global economy was much stronger then and they benefited from devaluation," said Dario Perkins from Lombard Street Research.

"Europe is repeating the same disastrous policy tried in Greece. They have not learned the lesson and it is hard to see how the outcome can be much better in Spain. The banking debts have been hidden and we don't yet know how much this will cost the government."

Mr. Rajoy warned of further bank rescues as lenders struggle with 176 billion euros in "troubled" assets. "A second wave of restructuring is inevitable," he said.

The fiscal cuts for 2012 will amount to 1.6% of GDP, though details are scant. It follows earlier cuts of 1% in May. Early retirement has been ended. Even saints days have been culled, shifting the holiday to Mondays to end the "bridge" of long weekends.