Bloomberg News

Spain’s ‘Blank Check’ Offers Rajoy Room on Deficit: Euro Credit

October 12, 2011

(See EXT4 for more on the euro-area financial crisis.)

Oct. 12 (Bloomberg) -- Spaniards will probably hand opposition head Mariano Rajoy a record mandate in elections next month. Unwilling to risk his lead in polls, the People’s Party leader hasn’t told voters what he’d do with it.

Five weeks before the Nov. 20 election that polls suggest he’ll win, Rajoy hasn’t said how he’ll cut spending or change labor rules. He’s pledged tax breaks for small businesses, said he “wouldn’t like” to cut pensions and vowed a “true” bank restructuring, without saying what that means. Voters don’t know who would be his finance minister.

That hasn’t stopped Spaniards from telling pollsters they’ll hand the PP its largest-ever majority as the country struggles with Europe’s highest jobless rate amid a three-year economic slump. With an outright majority and few election pledges to deliver on, Rajoy may be free to slash the budget deficit, overhaul labor rules and shield lenders from the sovereign-debt crisis.

The extra yield on Spanish 10-year bonds over German equivalents was at 291 basis points at 3:19 p.m. in Madrid, down two basis points from yesterday. That compares with a euro-era high of 418 basis points on Aug. 5 and an average of 15 basis points in the first decade of monetary union.

“The PP isn’t going to make any proposals from now until the elections -- it’s not worth making pledges that may scare part of the electorate,” said Ismael Crespo, a political scientist at the Fundacion Ortega-Maranon institute and former head of the state polling unit. “He’s seeking a blank check.”

Spain vs. Italy

Rajoy would inherit a deficit that was the third-largest in the region last year, a jobless rate of 21 percent and a banking industry struggling with surging borrowing costs. Even with the European Central Bank propping up the Spanish bond market since Aug. 8, the nation pays around 5 percent to borrow for a decade, more than twice what it costs Germany.

Spanish borrowing costs have fared better than Italy’s as both nations grapple with the debt crisis. The gap between what investors charge Spain to borrow for 10 years compared with Italy was less than 5 basis points on Aug. 8 when the ECB began buying their bonds. It was at 60 basis points today, partly reflecting potential political instability under Italian Prime Minister Silvio Berlusconi.

Rajoy, a 56-year-old former deputy prime minister who has lost two general elections since 2004, has pledged to send markets “very strong signals” and erect “barriers against contagion.” What that may entail wasn’t made any clearer in the 255-page autobiography he published last month or at last week’s PP conference in Malaga. He’s vowed to cut “superfluous” spending and said in Malaga “there’s no magic wand” to cure the economy’s ills.

‘Absolute Majority’

“The market would be reassured by any situation with a clear absolute majority, and will react positively to that,” said Gilles Moec, co-chief European economist at Deutsche Bank AG in London. “The risk for any party that comes up with a very detailed adjustment program is it would come under fire and could end up with a muddied result.”

A clear majority may also strengthen the new government’s hand to clean up regional finances as most of the 17 semi- autonomous regions are in PP control, Olaf Penninga, a fund manager at Robeco Groep in Rotterdam, said in a telephone interview. Prime Minister Jose Luis Rodriguez Zapatero had to woo regional parties from the Basque Country, Catalonia, and the Canary Islands to pass his minority government’s legislation.

‘Clear Outcome’

“If they don’t need support from the small regional parties, it would make it easier to take a credible approach to the regional governments’ finances,” said Penninga, who helps manage 150 billion euros, including Spanish debt. “There might be more investors coming in if there’s a clear election outcome.”

PP-led regional governments are already slashing spending as swollen budgets are limiting their access to capital markets, giving an indication of what Rajoy may do. Castilla-La Mancha’s administration aims to cut its deficit to 1.3 percent of output from 6.5 percent over two years, without raising taxes, while the region of Madrid has faced strikes by teachers protesting staff cuts.

Citizens consider austerity a “virtue” and leaders who are cutting spending aren’t being damaged by it politically, said Juan Jose Guemes, a professor at the IE business school and a former PP minister in the regional administration of Madrid.

Poll Predictions

The PP is set to win 193 of the 350 seats in Parliament, its largest-ever majority, according to a Sigma Dos survey published in El Mundo newspaper on Oct. 9. A separate poll in La Vanguardia the same day showed the party would claim 186 to 192 seats, while the Socialists would drop to 115 seats from the 169 the party has had since 2008.

Rajoy won’t put that result in danger, and the Spanish system traditionally holds prime ministers more to the pledges made at their investiture -- due in mid-December -- than to campaign promises, Crespo said.

“December 15 is when he will seek the backing of the Parliament,” he said. “And that’s when he really will have to commit.”

--Editors: Jeffrey Donovan, Mark Gilbert

To contact the reporter on this story: Emma Ross-Thomas in Madrid at

To contact the editor responsible for this story: Craig Stirling at

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