Market gloom dampens Spanish right's election joy

21st November 2011, Comments 0 comments

Markets pounded Spain's stocks and bonds Monday despite a thumping election win by the right and its promises to fix the country's economy and finances.

Spanish stocks slumped and borrowing costs rose, while the new government faced ongoing financial instability and the prospect of social protests when its planned austerity measures hit home.

Conservative leader Mariano Rajoy's Popular Party won by its biggest margin ever in Sunday's election after promising to ease Spain's 21.5-percent jobless rate and rescue it from the eurozone debt crisis.

His triumph sparked street celebrations by voters desperate for relief from Spain's economic pain.

But the party did not last long.

Spain's borrowing costs rose as the investors who help finance the eurozone's fourth largest economy day-to-day appeared to take no comfort from Rajoy's victory.

The interest rate charged on Spanish 10-year government bonds climbed to 6.500 percent in late morning trade from 6.345 percent at the close on Friday.

The debt risk premium -- the extra interest charged on Spanish bonds compared to safe-haven German debt -- widened to 4.58 percentage points from 4.33 points Friday.

Madrid's IBEX 35 index of leading shares fell by 2.33 percent to 8,116.1 points in mid-morning trading, dragged down notably by shares in big Spanish banks.

Spaniards had turned in huge numbers to the conservatives to fix the stalled economy after more than seven years of Socialist rule.

Rajoy's party won 44.62 percent of the vote and an absolute majority with 186 seats in the 350-seat lower house of parliament.

The Socialists under their candidate Alfredo Perez Rubalcaba took their hardest beating yet, with just 28.73 percent of the vote and 110 seats.

Rajoy, 56, has vowed to make cuts "everywhere", except for pensions, so as to meet Spain's target of slashing the public deficit to 4.4 percent of gross domestic product in 2012 from 9.3 percent last year.

Celebrating his victory on Sunday, he vowed to lead a "battle against the crisis" but warned there would be no "miracles" and the road ahead would be hard.

He will likely be sworn in from December 20, but Spain's press warned that the markets may not wait that long.

The centre-left newspaper El Pais called on the victor to join with outgoing Prime Minister Jose Luis Rodriguez Zapatero to reassure markets about Spain's finances.

"They must make a joint and unequivocal gesture this very Monday, before doubt returns about European sovereign debt, to state convincingly that Spain is in a state to take whatever economic decisions may be necessary," it said.

But analysts such as Soledad Pellon of IG markets warned that the European Central Bank may be the only one able to settle the crisis of confidence across the eurozone.

"What is really important now is to know if the ECB will agree to lend to countries in need," Pellon said.

Zapatero appeared before reporters later on Monday, acknowledging Rajoy's victory and pledging to cooperate with him.

"The most important thing at this moment is that Spain stays solvent," he said.

Zapatero's government was blamed for reacting too late to the 2008 property market implosion, which combined with a global financial crisis to throw millions out of work.

As his government cut spending to avoid a disastrous loss of confidence by the debt markets, it slashed public sector wages by an average 5.0 percent, froze pensions and raised the retirement age from 65 to 67.

The cuts sparked an angry protest movement dubbed "the indignants".

Analysts said the indignants drove a strong performance in Sunday's election by the minority left-wing and environmental alliance IU, which raised its number of seats in parliament from two to 11.

A big banner hung in Madrid's Puerta del Sol square foretold a winter of protests.

"After November 20 the struggle continues in the street," it read.

© 2011 AFP

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