Bloomberg News

Rajoy Says Spain Needs Austerity for Funding as Yields Climb

April 16, 2012

Prime Minister Mariano Rajoy. Photographer: Pablo Blazquez Dominguez/Getty Images

Prime Minister Mariano Rajoy. Photographer: Pablo Blazquez Dominguez/Getty Images

Prime Minister Mariano Rajoy said Spain must slash its budget deficit in order to maintain access to financing, as bond yields rose to the highest level since his government came to power four months ago.

“The fundamental objective at the moment is to reduce the deficit,” Rajoy told a conference in Madrid today. “If we don’t achieve this, the rest won’t matter: we won’t be able to fund our debt, we won’t be able to meet our commitments.”

Rajoy has raised the threat of a bailout to persuade Spaniards to accept spending cuts and tax increases even with the economy shrinking. Economy Minister Luis de Guindos was due to meet investors today in Paris as the 10-year bond yield surged to more than 6 percent.

De Guindos will also meet European Central Bank President Mario Draghi tomorrow, a spokeswoman at the ministry said, without giving details. The Frankfurt-based bank, which started buying Spanish bonds in August, should resume those purchases, Jaime Garcia-Legaz, a deputy minister in the economy department, said on April 13.

“No one can expect such deeply rooted issues to be resolved in a few weeks,” Rajoy said.

Spain is the euro area’s fourth-biggest economy and the government forecasts it’ll contract 1.7 percent this year as it implements the deepest budget cuts in more than 30 years. The plan seeks to shrink the deficit to 5.3 percent of gross domestic product this year from 8.5 percent last year.

Market Slump

Rajoy’s announcement on March 2 that he would miss a deficit target of 4.4 percent triggered the slump in Spanish markets.

In power since December, Rajoy has raised taxes, cut spending, changed labor rules and forced banks to increase provisions against troubled real-estate assets as he seeks to revive growth while reining in the budget gap.

“No one, whether governments or institutions, inside or outside our country, should doubt Spain’s commitment to the euro and European political integration,” Rajoy said.

Rajoy pledged more measures as he defended the tools the central government has created to increase its grip on regional governments. The Cabinet will approve measures this month to help the regions reduce spending in health and education, which account for about 60 percent of their budgets.

Education Minister Jose Ignacio Wert today told education chiefs from the regions that the government may increase by as much as 20 percent the number of students per class and stop hiring temporary staff to replace teachers before the 10th day of absence, Efe newswire reported.

A similar meeting between the Health Ministry and the regions’ health officials will take place on April 18.

“We have done a lot in four months but we are still at the beginning of a long reformist path,” Rajoy said.

To contact the reporter on this story: Angeline Benoit in Madrid at abenoit4@bloomberg.net

To contact the editor responsible for this story: Emma Ross-Thomas at erossthomas@bloomberg.net


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