Spain's likely PM tells markets: change is coming

15th November 2011, Comments 0 comments

The front-runner to be Spain's next prime minister, Mariano Rajoy, told nervous markets Tuesday that change is coming, as the debt risk premium shot to a new euro-era high.

The conservative opposition leader is romping towards a landslide win over the ruling Socialists in general elections Sunday, polls show, in the midst of economic crisis.

Rajoy vowed to send a message of confidence to the markets if his Popular Party wins.

"Expectations for next year are not good but I insist: the most important thing is to send a message that things are going to change, to give a message within and give a message outside Spain," he said.

"The first thing is to send a message of confidence," he said in an interview published in centre-right daily El Mundo.

"We need to tell investors that they must invest and that they will have the government's support; and beyond Spain the message is that we will be serious, that we will do things properly and that we are betting on the euro."

Spain had appeared to largely escape the wrath of the markets as traders were consumed by an unravelling Greek rescue plan and political chaos in debt-burdened Italy.

But on Tuesday the risk premium, the extra return investors demand to buy Spanish 10-year government bonds over comparable safe-haven German debt, hit a euro era record of 4.50 percentage points.

The 10-year Spanish government bond yield broke the 6.0-percent barrier the previous day for the first time since August.

"I think the thing that is really going to surprise the politicians is that the Rajoy victory is already factored in," said Edward Hugh, independent economist based in Catalonia.

"There is not going to be a shockwave or anything from Rajoy arriving. What people want now is to see what he is going to do."

The Spanish Treasury had to pay rates of more than five percent a year in an auction of 12- and 18-month bills that raised 3.158 billion euro ($4.3 billion) Tuesday, up from less than four percent a month earlier.

On Thursday, it faces another critical test when it tries to sell up to 4.0 billion euros in 10-year bonds.

After three years of economic crisis, which has pushed up the unemployment rate to 22.5 percent, polls show the 36-million-strong electorate is poised to put the Popular Party in government.

Rajoy vowed to act swiftly if elected.

"Not long afterwards I will present a first plan of economic measures," he said.

The opposition leader underscored the importance of a constitutional reform passed with his party's support in October that will put a long-term cap on future deficits.

If elected, Rajoy said he would rapidly enact accompanying legislation setting the deficit limit.

"It will be one of the first laws we submit," he said.

Rajoy has said he plans to meet with Spain's 17 powerful regional governments to discuss spending and debt. He has already warned he would ban regional deficits.

"The first message we have to give is that Spain is taking the public deficit seriously," he said.

The Bank of Spain and the European Commission have predicted that Spain will miss its target of cutting the deficit to 6.0 percent of gross domestic product this year from 9.3 percent last year.

"The second measure is the restructuring of the financial sector," weakened by the 2008 property bubble collapse, Rajoy added, calling notably for "greater concentration" of entities in the sector.

© 2011 AFP

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