Spain's victorious right collides with financial reality

21st November 2011, Comments 0 comments

After thundering to a historic election victory Spain's right collided with harsh financial reality Monday as investors pounded Spanish stocks and debt.

Conservative leader Mariano Rajoy's Popular Party won by its biggest margin ever in Sunday's election, unleashing street celebrations by voters desperate to escape a punishing 21.5-percent jobless rate.

But the party did not last long.

Spanish stocks greeted the win by slumping 2.0 percent. The IBEX 35 index of leading shares fell to 8,143.5 points in mid-morning trading, dragged down notably by shares in big Spanish banks.

More critically, Spain's borrowing costs rose.

The interest rate charged on Spanish 10-year government bonds climbed to 6.406 percent 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 -- rose to 4.69 percentage points after opening at 4.40 percentage points.

Spaniards had turned in huge numbers to the conservatives and their promise of change to fix the stalled economy.

Rajoy's Popular Party won by the biggest margin in its history, securing 44.62 percent of the vote and an absolute majority with 186 seats in the 350-seat lower house of parliament.

The ruling Socialists took their severest beating yet, taking just 28.73 percent of the vote and 110 seats.

Investors had already factored in a conservative win, analysts said: now they want to hear details of the bearded 56-year-old Rajoy's economic plan, which he spoke of only in generalities during the campaign.

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

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

"The crisis gives all the power to Rajoy," headlined Spain's leading paper El Pais.

The centre-left newspaper 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."

Analysts at private bank Berenberg said there was a two out of three probability that the eurozone debt crisis would escalate with a buyers' strike on Italian debt.

That would prompt the European Central Bank to act, they said.

"If so, the ECB would eventually have to intervene massively to prevent a cascade of sovereign and bank defaults and preserve the very existence of the euro and the ECB itself," the analysts said in a report.

The answer to the crisis in eurozone's "periphery" states such as Italy and Spain may lie with the ECB, the Europe Financial Stability Facility bailout fund or the International Monetary Fund, they said.

"Impressive reforms at the periphery, potentially supported by EFSF and IMF credit lines, will help to defuse the crisis for good without a need for massive interventions," the Berenberg report said.

Zapatero's Socialist 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.

Zapatero, who decided not to run for a third term, called the election four months early to give a new government the chance to confront the financial crisis.

© 2011 AFP

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