The conservative leader pledged to fight Spain's unemployment curse by shaking up the labour markets. The jobless rate has hit 22.8pc with 5.4m people out of work. The tally is certain to rise further as the economy falls back into recession.
Spain's 10-year bond yields dropped to 5.09pc, far below the 6.5pc stress peak seen last month, even though Mr Rajoy said the government will miss its budget deficit target of 6pc 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 1pc 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 45pc over the preceeding three years.
It may prove harder this time within the euro straight-jacket. "The global economy was much stronger then and they benefitted 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 €176bn in "troubled" assets. "A second wave of restructuring is inevitable," he said.
The fiscal cuts for 2012 will amount to 1.6pc of GDP, though details are scant. It follows earlier cuts of 1pc 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.
The package came as Standard & Poor's downgraded the region of Valencia to BBB- after it covered just 59pc of a bond issue. The agency said Valencia has "no clear access" to the capital markets. There is little risk of default on €1.6bn of maturing debt on Thursday, but S&P said the Junta is being kept afloat by money from Madrid.
Days earlier Fitch Ratings issued a downgrade warning for Spain and a clutch of EMU states and warned that a comprehensive solution to Europe's debt crisis may be "technically and politically beyond reach".
The agency said: "Of particular concern is the absence of a credible financial backstop. This requires more active and explicit commitment from the European Central Bank to mitigate the risk of self-fulfilling liquidity crises for potentially illiquid but solvent euro area member states."
The Bank of Spain said bad loans had reached a 17-year high of 7.4pc in October as the damge continues to filter through from the housing crash. The Madrid property consultants RR de Acuna predicts that prices will have to fall another 20pc before the market clears an overhang of one million homes.
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