Bloomberg News

Rajoy Gain in Spain May Be Poisoned Chalice as Yields Rise

November 18, 2011

(Adds today’s bond yields in fifth paragraph.)

Nov. 17 (Bloomberg) -- Losing two elections may be the best thing that ever happened to Mariano Rajoy’s career.

After Spain’s deepest economic crisis in six decades eroded support for the governing Socialists, the 56-year-old People’s Party leader looks set to win by the biggest margin since 1982, leaving him to overhaul the euro area’s fourth-largest economy.

“Rajoy has reached this point thanks to both his merit and the lack of merit of others,” said Pablo Onate, general secretary of the Spanish Political Science Association in Madrid. “He has succeeded in taking control of the party and he’s been lucky Spain has been so badly managed.”

Spain is the last of the five countries at the heart of the euro region debt crisis to change leaders this year. Should he prevail on Nov. 20 elections, as polls predict, Rajoy’s first task will be to prove to bond markets his nation won’t go the same way as Portugal, Ireland and Greece in needing a bailout.

Spanish 10-year bond yields rose to a euro high today after the Treasury sold 3.56 billion euros ($4.8 billion) of a January 2022 benchmark security. The rate rose as high as 6.758 percent at 12:10 a.m. in Madrid, breaking through the Aug. 5 level that prompted the European Central Bank to start buying Spanish debt.

“There is a ‘‘euro zone contagion’’ premium built into Spanish spreads,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London. “Fixing Spain means fixing the eurozone, Italy in particular.”

Italian Yields

Yields are more than 7 percent in Italy, where Prime Minister Silvio Berlusconi stepped down after pushing austerity measures through parliament. In Greece, where former European Central Bank Vice-President Lucas Papademos set up a transition government last week, the comparable yield is 28.7 percent.

“It is positive that there is strong political stability in Spain and that fiscal orthodoxy is the mainstream,” said Thibault Mercier, an economist at BNP Paribas in Paris. “In Greece, it’s difficult to make forecasts above 10 days and that’s the worst thing for markets.”

As Spain battles to fend off the debt crisis, Rajoy is counting on his previous time as interior minister and deputy prime minister to convince voters he can tackle the euro area’s third-largest budget deficit compared with the size of the economy. He must also reduce an unemployment rate of 23 percent, the highest in the European Union.

Plan B?

“The People’s Party government will have to hit the floor running given the worsening situation in the bond market,” Riccardo Barbieri, London-based chief European economist at Mizuho International Plc, said on Nov. 14. “Cutting the deficit in this situation will be extremely difficult. Rajoy will need to have a Plan B ready.”

Rajoy had a 17.8 percentage-point lead in the latest opinion poll over former deputy premier Alfredo Perez Rubalcaba, 60, who became Socialist Party leader after Prime Minister Jose Luis Rodriguez Zapatero said he wouldn’t seek a third term.

The People’s Party would win 198 of the 350 seats in parliament, compared with 112 for the Socialists, according to the poll in El Mundo’s Sunday edition. That would be the largest majority secured by any party since Felipe Gonzalez led the Socialists to victory 29 years ago, based on government data.

Yet Rajoy’s program gives voters little indication of how he plans to create jobs and keep Spain from getting mired in the euro’s woes, according to Jose Antonio Sanahuja, international relations professor at Madrid’s Complutense University.

No Labor Overhaul

Rajoy’s party manifesto vows to protect health care, pensions and education without explaining how he will slash deficits, other than chasing what the party calls “superfluous spending.” Rajoy also hasn’t detailed how he will overhaul Spain’s labor market, a crucial step to foster job creation. Economic growth stalled in the third quarter after slowing to 0.2 percent in the second quarter.

“There is a deliberate strategy not to give a program and to maintain ambiguity,” Sanahuja said in an interview. “He lets problems solve themselves.”

Zapatero turned his back on his Socialist Party’s traditional policies in May 2010 as he slashed wages and froze pensions in an attempt to protect Spain from the crisis consuming the Greek government.

Zapatero, 51, has been premier for close to eight years after unexpectedly beating Rajoy in 2004 elections. The governing People’s Party was leading polls in March 2004, when a terrorist attack on commuter trains in Madrid’s Atocha train station killed 192 people.

Opinion Flip

Outgoing premier Jose Maria Aznar’s government initially blamed Basque terror group ETA, even as a group linked to al- Qaeda said it was responsible for the attack. The claim provoked demonstrations in the streets as protesters accused the government of lying. Aznar’s administration had supported the U.S.-led war in Iraq, which polls at the time showed 90 percent of the population opposed. Zapatero won again in 2008.

“Those were particularly bitter moments, during which I doubted whether I should remain the party’s leader or leave politics altogether,” Rajoy wrote about the event in his autobiography, published in September.

Born and raised in the northern region of Galicia, Rajoy said he followed his grandfather’s steps into politics.

In his autobiography, the son of a judge and a home-maker mother describes a happily uneventful childhood in a typical Spanish family. The weekly highlight was to enjoy drinks and tapas with neighbors at the local bar before digging into his mother’s “cocido,” a Galician stew of meat and chickpeas.

Post-Franco Politics

He joined Alianza Popular under Manuel Fraga, the former minister of General Francisco Franco who founded the precursor to the People’s Party, to run in the post-dictatorship election of 1977. Rajoy left Galicia, where he started out as a registrar general, when he was called to Madrid by Aznar. He married in 1996 and has two boys.

“My party and I have experience and we are prepared,” Rajoy said during the only televised debate of the campaign on Nov. 7. “We’ve done a lot in difficult times before. Spain needs a change and it needs it urgently.”

The People’s Party is forecast to win in 11 surveys conducted since Sept. 5, with an average 46.2 percent of the vote compared with 31.5 percent for the Socialists.

Rajoy is recommending “dialogue” and sound economic management to woo an electorate shaken by the deepest austerity measures in the last 30 years. He is also being careful not to alienate potential supporters defecting from the Socialists, according to Javier Del Rey Morato, political communication professor at Madrid’s Complutense University.

‘No Charm’

“Rajoy is doing everything he can so that people in the center can vote for him without disgust,” Del Rey Morato said. “He has no charm,” though “he is discreet, well counseled, he knows how to adapt and manage time,” said Del Rey Morato.

Those traits have come in handy before. Since Aznar named him his successor, Rajoy has weathered internal revolts and broadened the support base for the People’s Party.

After his second defeat, in 2008, he was able to defend his leadership when a faction of his party, led by the president of Spain’s second-richest region, Esperanza Aguirre in Madrid, publicly criticized his campaign.

This time around, he’s resisting calls from within his People’s Party to limit free education and health care or increase taxes paid by consumers to reduce employer contributions to social security.

Gay Marriage?

The European debt crisis is also allowing him to ignore the traditional areas of his party’s agenda in the mainly Catholic country. While Rajoy opposed Zapatero’s legalization of gay marriage, his program doesn’t include any reversal of the law.

“He has the courage of prudent men,” Juan Carlos Aparicio, a former minister who served in the same cabinet as Rajoy under Aznar between 2000 and 2002, said in an interview. “He is reasonable and sensible.”

Rajoy will follow new leaders across the most indebted parts of the euro region.

In Italy, Mario Monti, a former EU competition chief, is taking over from Berlusconi. Greece’s George Papandreou stepped down last week for Papademos.

Portuguese elections in June swept the Social Democratic Party’s Pedro Passos Coelho to power two months after the country needed an international bailout. Irish elections in February saw the dismissal of the Fianna Fail government with a record-low result for the party less than three months after the country secured rescue funding.

“I propose to you all that we work together to put an end to this situation,” Rajoy said in the televised debate. “To bring back confidence in the Spanish economy and create jobs.”

--With assistance from Andrew Davis in Rome. Editors: Rodney Jefferson, Anne Swardson

To contact the reporter on this story: Angeline Benoit in Madrid at erossthomas@bloomberg.net

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


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