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Zapatero Calls Early Spanish Elections Amid Debt Crisis

July 29, 2011

(Updates with analyst comment in fifth paragraph, bonds in seventh. See {EXT4 <GO>} for more on Europe’s debt crisis.)

July 29 (Bloomberg) -- Spanish Prime Minister Jose Luis Rodriguez Zapatero called early elections as austerity measures erode support for his Socialist Party and the country seeks to convince investors it can control the budget deficit.

Elections will be moved forward to Nov. 20 from March, Zapatero said in Madrid today. With polls showing the Socialists trailing the opposition People’s Party led by Mariano Rajoy, Zapatero has said he won’t seek a third term at the helm of the euro area’s fourth-largest economy.

“The decision to announce the election calendar today is to project political and economic certainty for the next few months: about what must be done, what we’re going to do and about the date of elections,” Zapatero said.

Europe’s debt crisis forced Zapatero to ditch pledges for more social spending and replace them with public-sector wage cuts as he struggled to tackle unemployment of more than 20 percent. Adding to the pressure, Moody’s Investors Service put Spain’s credit rating on review for possible downgrade today as Greece’s bailout last week increases the prospect bondholders will have to contribute to more rescues.

“The election adds an extra element of near-term uncertainty,” Holger Schmieding, chief economist at Joh. Berenberg Gossler & Co. in London, said in a note to investors. “But in the longer run, the result could be positive. A fresh government with a fresh mandate could strengthen rather than weaken the reform momentum in Spain.”

Euro Gains

The euro rose against the U.S. dollar, gaining 0.2 percent to 1.4369 at 3:43 p.m. Frankfurt time.

Spanish 10-year bonds fell for a third straight day, pushing the yield on the securities four basis points higher to 6.1 percent as of 2:43 p.m. in London. The additional yield investors demand to hold the securities instead of benchmark German bunds rose 15.5 basis points to 355.6 basis points.

In its note today, Moody’s said “challenges” remain for Spain to its achieve “long-term budget balance” because of subdued economic growth and lack of spending discipline by some regional and local governments. The latest rescue plan for Greece is likely to increase pressure on Spain as it has “signaled a clear shift in risk for bondholders of countries with high debt burdens or large budget deficits,” Moody’s said.

‘Extra Efforts’

Zapatero said the government would make “extra efforts” to reach deficit targets and reduce unemployment. His government is set to pass a decree on Aug. 19 that will improve the corporate tax take and cut pharmaceutical spending, he said.

“I believe that the basis for economic recovery and the foundations of a new stage of growth in Spain have been laid,” Zapatero said, adding that it would still take time for the recovery to gather the desired pace.

Zapatero may be counting on an improvement in unemployment numbers in coming months that will reflect seasonal hiring for the tourism industry, said Javier Diaz-Gimenez, an economics professor at the University of Navarra’s IESE business school.

“The good news is that bringing forward the elections helps to create a new macro-economic scenario for the country,” said Diaz-Gimenez. “It’s an opportunity to create an economic platform to address Spain’s problems of weak growth and very high unemployment.”

Austerity Program

Zapatero, who leads a minority government, pushed through Spain’s biggest austerity program in at least three decades and had pledged to serve out his four-year term to see the plan through. Alfredo Perez Rubalcaba, the Socialist candidate to succeed him as premier, proposes taxing the wealthiest and making banks hire young Spaniards, who are struggling under a 44 percent unemployment rate and have held protests across the nation.

“The government will continue to exercise all its constitutional faculties with all intensity in order to protect the economic recovery, the reforms that have been approved and to control the public deficit, a fundamental task,” Zapatero said.

The People’s Party has promised austerity measures and new labor rules, even though it voted against Socialist legislation to cut spending and raise the retirement age. It says Spain needs further labor-market changes to spur growth.

The PP would win 43.1 percent of the vote if elections were held now, compared with 36 percent for Zapatero’s party, a July 27 poll by the state-run Center for Sociological Research suggested. The Socialists still reduced the People’s Party’s lead to 7.1 percentage points from more than 10 points in April. The poll of 2,475 people had a margin of error of plus or minus 2 percentage points.

Francisco Gonzalez, chairman of Banco Bilbao Vizcaya Argentaria SA, Spain’s second-biggest bank, said Zapatero had made the right decision in calling early elections.

“Spain needs a strong government that takes decisions that place it back on the same level as the most important countries of Europe,” Gonzalez said in a statement e-mailed by the bank.

----With assistance from Tony Czuczka and Patrick Donahue in Berlin, Sharon Smyth, Manuel Baigorri and Angeline Benoit in Madrid and Paul Dobson in London. Editors: Alan Crawford, Eddie Buckle

To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net Charles Penty in Madrid at cpenty@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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