Bloomberg News

Spanish Bond Drop Sends Yields to Record on Rajoy Budget Concern

June 12, 2012

Prime Minister Mariano Rajoy

Prime Minister Mariano Rajoy, who sought a 100 billion euro rescue for Spanish banks on June 9, has built his strategy for avoiding a full-blown sovereign bailout around meeting deficit goals that economists at Goldman Sachs Group Inc. and Societe Generale SA said may be impossible. Photographer: Angel Navarrete/Bloomberg

Spain’s bond yields rose to a record as Fitch Ratings’s prediction that Prime Minister Mariano Rajoy will miss budget-deficit targets stoked concern a 100 billion- euro ($124 billion) lifeline for banks won’t be enough to stabilize the economy.

The yield on 10-year government debt rose for a third day, gaining 33 basis points to 6.83 percent. The spread over German bunds widened 23 basis points to 542 basis points as of 4:06 p.m. in Madrid.

Rajoy has built his strategy for avoiding a full-blown sovereign bailout around meeting deficit goals that economists at Goldman Sachs Group Inc. (GS:US) and Societe Generale SA (GLE) said can’t be achieved. Investors’ concerns are straining Europe’s defenses before an election in Greece that may determine whether the country stays in the euro area.

“An economy in recession like Spain can’t cut its deficit by 6 percentage points, it’s impossible,” said Jose Carlos Diez, chief economist at Madrid-based brokerage Intermoney SA. “Does Brussels want us to change the law of gravity as well?”

Greeks will vote June 17 on whether to back Alexis Tsipras, who wants to scrap the austerity plan dictated by the EU and the International Monetary Fund, as a condition of its bailout. New Democracy leader Antonis Samaras, who supports the bailout conditions, said backing Tsipras will see Greece effectively thrown out of the euro.

There is a 50.7 percent chance that a euro member leaves the single currency area by the end of next year, according to bets on Intrade.com. That compares with 55 percent a week ago.

Plan Needed

European leaders will see the risks of a euro breakup increase unless they can develop a plan for resolving the crisis, Fitch Managing Director Ed Parker said at an event in Oslo today.

“Euro-zone politicians need to take further steps forward to reduce the risks there and we think that further steps will be required in the area of public finances,” Parker said. “We believe Spain will miss its budget deficit targets again this year and next by a substantial margin.”

The European Commission forecasts that Spain will post deficits of 6.4 percent of gross domestic product this year and 6.3 percent in 2013 even after unveiling 45 billion euros of spending cuts and tax increases. Rajoy’s aim is a deficit of 5.3 percent of GDP.

Rajoy’s cuts are so deep, equivalent to about 4 percent of last year’s GDP, they are undermining growth and reducing tax revenue, according to James Nixon, chief European economist at Societe Generale in London.

‘Self-Defeating’ Cuts

“These massive fiscal tightenings are actually self- defeating,” Nixon said in a telephone interview. “That particularly German focus on deficit cutting is arguably very misplaced in Spain.”

Rajoy stuck to his deficit target again when he discussed the bank bailout on June 10, saying that a balanced budget is the first plank of his plan to restart the Spanish economy, which slipped into its second recession in three years in the fourth quarter of 2011.

“A clean-up of the public finances was necessary to grow and to create jobs,” he said.

Media Criticism

Investor skepticism has been mirrored by criticism in the Spanish media, where the premier has been attacked for refusing to acknowledge he took a bailout and for allowing Economy Minister Luis de Guindos to announce the measures. The prime minister left Spain to watch the national soccer team play in Poland on June 10 after commenting on the bailout.

Even presenters on Spain’s leading pop music radio station, Los 40 Principales, who typically discuss new releases from Lady Gaga and celebrity gossip, lampooned the premier last night for saying he had time to attend the soccer game because he’d solved the problems in the banking industry.

While economists say Spain can’t meet its targets, Bundesbank board member Andreas Dombret said yesterday central bankers are unlikely to take any further measures to boost economic growth after offering about 1 trillion euros of three- year loans since December.

“We have done our part,” Dombret said in an interview in London. “Now it’s up to the political leaders to deliver on the fiscal and structural policy side.”

To contact the reporters on this story: Ben Sills in Madrid at bsills@bloomberg.net; Josiane Kremer in Oslo at jkremer4@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net


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